Analysts at Ambit Capital expect Iran war to slow bank credit growth to 10-12 per cent in bear case scenario, pressure margins, and cap liquidity. It prefers private bank stocks like HDFC & ICICI Bank

The Iran conflict could cast a shadow on India’s banking sector outlook, warned analysts at Ambit Capital, with a prolonged war affecting credit growth, margins and asset quality over the medium-term.

 

In a recent report, the brokerage said that while the sector remains structurally resilient, rising global uncertainty and supply-side disruptions may temper near-to-medium term growth expectations.

Iran war may cap credit growth 

According to Ambit Capital, systemic credit growth could remain steady, though downside risks may emerge if geopolitical tensions persist. 

“While credit outlook remains fundamentally sustainable, the momentum faces geopolitical risks — specifically supply chain disruptions and liquidity tightening — leading us to project FY27E growth at 11-13 per cent under the base case that assumes geopolitical tensions ease by April 2026 with business activity normalising by H1FY27,” it said in the report.

 

While a bull case assumes 13-15 per cent credit growth this financial year,  a prolonged conflict scenario may take the growth to 10-12 per cent, reflecting weaker business sentiment and tighter liquidity conditions. 

 

Overall, the brokerage has cut its earnings CAGR estimate to 15.7% per cent from 17.3 per cent, citing the likelihood of a demand shock and near-term pressure on bank earnings due to macro uncertainty. 

 

Deposit stress and margin pressures

 

Ambit Capital said a simultaneous risk, along with the geopolitical shock, is the ongoing “deposit paradox”, where household savings are increasingly shifting towards capital markets, tightening liquidity for banks.

 

The brokerage said the sector is “grappling with ‘deposit paradox’ as urban-centric savings migrate to capital markets, heightening rate sensitivity.” 

 

This structural shift, combined with geopolitical volatility, could keep funding costs elevated and limit margin expansion. While Ambit expects some recovery in net interest margins (NIMs), it cautioned that the pace will be gradual.

 

“We anticipate granular NIM recovery from H1FY27. The pace is constrained by tight systemic liquidity.” 

 

As per the brokerage, while the tail-end of liability repricing offers near-term stability through H1FY27, a meaningful margin revival over FY27–28 hinges on the maturation of high-cost, long-term deposits. 

 

For now, the brokerage anticipates a stable repo policy rate, but an rate hike by the Reserve Bank of India (RBI), to manage inflation, would likely be margin-accretive for private banks (more than public sector banks) through rapid yield transmission. 

 

Asset quality remains a relative bright spot

 

Despite macro risks, asset quality across the banking system remains stable, supported by strong balance sheets and provisioning buffers.

 

Ambit pointed out that gross NPAs have declined to around 2.2 per cent, reflecting a “secular trend” of improvement driven by recoveries and prudent underwriting. 

 

The brokerage added that “healthy reserve buffers and stable slippage ratios would insulate the sector from potential macroeconomic shocks,” suggesting that even in a stressed scenario, asset quality deterioration may be contained. 

Private banks better placed than PSU peers

 

In this backdrop, Ambit Capital believes private sector banks are better placed over public sector lenders as the former have structural advantages, including better liability franchises, stronger pricing power and superior margins. 

 

“Private sector banks benefit from superior yield-enhancement capabilities and higher floating-rate loan exposure, which offers better protection in volatile rate cycles,” the brokerage said. 

 

In contrast, PSU banks face challenges from weaker core profitability and higher dependence on certain loan segments such as gold loans, making them more vulnerable to volatility.

 

Additionally, the recent rally in PSU bank stocks appears “decoupled from stagnant return ratio and weak core profitability, Ambit noted. 

 

As an investment strategy, the brokerage recommends a selective approach, focusing on high-quality lenders with strong balance sheets and deposit franchises.

 

Its top picks among large banks are HDFC Bank, ICICI Bank, Axis Bank, and State Bank of India.

 

Among smaller lenders, it prefers Federal Bank and Karur Vysya Bank, while favouring Ujjivan Small Finance Bank to play a recovery in microfinance. 

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not sharechart. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.