HDFC Bank, Axis Bank: UBS's Picks Following RBI's CRR Cut
UBS highlighted HDFC Bank Ltd. and Axis Bank Ltd. as preferred picks in light of the Reserve Bank of India's decision to cut the Cash Reserve Ratio by 100 basis points to 3%.
This move, along with a 50 basis point reduction in the repo rate to 5.5%, is expected to release Rs 2.5 trillion of surplus liquidity into the system, potentially boosting deposit growth by 2-3%.
UBS analysts noted, "The CRR cut is incrementally positive for the sector and partly offsets the Net Interest Margin pressure due to repo rate cuts, starting Q3FY26E."
They further explained that this liquidity injection would support system loan growth, which they estimate at 12-13% year-on-year for FY26-27, compared to the current 9.8% as of May.
The report highlighted that the CRR cut was a "positive surprise" and could result in a 7-9 basis point positive impact on NIM estimates for banks under UBS's coverage. This is expected to drive upward revisions in Earnings Per Share for consensus, driven by loan growth and improved NIMs.
UBS's constructive take on the sector is reinforced by the RBI's easing stance, which is particularly advantageous for mid-cap banks like AU Bank and large banks with greater liquidity requirements such as HDFC Bank and Axis Bank. "HDFCB is our preferred pick," the report stated, noting HDFC Bank and Axis Bank had the highest Loan-to-Deposit Ratio (LDR) among banks covered as of Q4FY25.
The report also mentioned that the front-loading of repo rate cuts and the shift from an accommodative to a neutral monetary stance likely indicates that the rate cut cycle might be nearing its end, with a 25-50 basis point buffer in case growth surprises on the downside. The CRR cuts will be implemented in four equal tranches between September 6 and November 29.
UBS said, "We nevertheless expect near-term NIMs to decline as the benefit of the CRR cut will likely accrue from Q3 onwards. A bigger repo rate cut has brought forward the NIM decline cycle and likely trough to Q2FY26 in our view."
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