Bank stocks: Dalal Street darlings HDFC Bank, Axis Bank, and Kotak Mahindra Bank have just been downgraded by leading domestic brokerage ICICI Securities from ‘Buy’ to ‘Add’ as it sees limited upside amid weaker near-term performance expectations, especially around earnings growth.

According to the brokerage, these private banks will see near-term weakness in net interest income (NII) and profit after tax (PAT) along with weak credit growth, thus pressuring the lenders.

While a rate cut by the Reserve Bank of India (RBI) is seen as boosting the banking counters, ICICI Securities believes it could pressurise the net interest margins (NIMs) for HDFC Bank, Axis Bank and Kotak Mahindra Bank due to a mismatch in the loan and deposit rates.

Pressure on margins

The brokerage explained that the faster re-pricing of loans yields, especially under the external benchmark lending rate regime, would weigh on NIMs across banks.

The RBI has cut rates twice by 25 basis points each and with more likely to follow, banks with loans linked to external benchmarks (like the repo rate) will see loan interest rates fall quickly. But deposit rates (especially on term deposits) won’t drop as fast. This mismatch could hurt banks’ profit margins (NIMs).

The brokerage added its impact was visible for the first time in Q4FY25, albeit only partially. “Effectively, the rate cut impact was only partial in Q4FY25 for large private banks but are likely to experience the full impact starting Q1FY26. Further, other factors such as agri slippages, recoveries, and day-count may also turn adverse,” it said.