RBI Rate Hike Puts Bank Stocks in Focus: PNB, Axis Bank Among Potential Beneficiaries

The Reserve Bank of India has raised its benchmark repo rate by 25 basis points to 5.50%, bringing an extended period of monetary easing to an end and putting the spotlight back on financial-sector stocks.

The October policy move was the first repo-rate increase since February 2023. The RBI also shifted its policy stance to “calibrated tightening”, reflecting renewed concerns over inflation and global financial conditions.

Against this backdrop, a Morgan Stanley analysis had identified several banks and housing finance companies that could see comparatively stronger earnings benefits if lending rates adjust alongside the policy rate.

Why the rate hike matters for banks

The effect of a repo-rate increase is not identical across financial institutions. A key factor is the proportion of a lender's loan book linked to external benchmarks such as the repo rate and how quickly those loans reprice.

Morgan Stanley's analysis suggests that lenders with greater exposure to repo-linked assets could see an improvement in net interest margins if lending rates rise faster than their funding costs.

Among the banks covered, Punjab National Bank (PNB) was estimated to have one of the strongest potential benefits. The analysis projected a 10-basis-point improvement in net interest margin and a 9% rise in profit before tax under its rate-hike scenario.

Axis Bank and Kotak among private-bank beneficiaries

Private-sector lenders could also see meaningful gains.

Morgan Stanley estimated that Axis Bank and Kotak Mahindra Bank could each experience an 11-basis-point improvement in net interest margin under the assumed scenario. The corresponding projected increases in profit before tax were 5% for Axis Bank and 4% for Kotak Mahindra Bank.

The analysis also estimated a 9-basis-point NIM benefit for both HDFC Bank and ICICI Bank, with potential PBT increases of 4% and 3%, respectively.

Federal Bank was similarly estimated to receive a 9-basis-point NIM benefit, alongside a potential 5% improvement in profit before tax.

PSU banks also feature in the outlook

The potential impact is not limited to private lenders.

Morgan Stanley estimated that Bank of India and Canara Bank could each see a 7-basis-point improvement in net interest margin. Their projected PBT gains stood at 8% and 6%, respectively.

Bank of Baroda was estimated to receive a 6-basis-point NIM benefit and a 5% increase in PBT, while State Bank of India was projected to see a 5-basis-point NIM improvement and a 4% increase in PBT.

The estimates highlight how the composition of a bank's loan book can determine whether a rising-rate environment becomes supportive for earnings.

Housing finance companies could benefit

Morgan Stanley's assessment also points to housing finance companies as an important segment to watch.

LIC Housing Finance was estimated to record the largest PBT benefit among the HFCs covered, with a potential 7.2% increase under a 25-basis-point rate-hike scenario.

REC and PFC were estimated to see PBT increases of 4.6% and 3.8%, respectively, while PNB Housing Finance was projected to gain about 3%. Can Fin Homes, Aditya Birla Capital and Home First Finance were also included among companies with potential positive impacts.

However, the effect is not uniformly positive across the broader NBFC universe. Morgan Stanley's scenario showed limited or negative PBT effects for several non-bank lenders, including Bajaj Finance, Aavas Financiers, Aptus Value Housing Finance and Shriram Finance.

Previous rate cycle offers a useful comparison

The earlier tightening cycle provides some indication of how individual lenders can respond to higher rates.

Between the fourth quarter of FY22 and the first quarter of FY24, the repo rate increased by a cumulative 250 basis points over six quarters. During that period, RBL Bank recorded the largest NIM expansion among the lenders cited in the analysis, followed by Kotak Mahindra Bank and ICICI Bank.

Bank of India and Axis Bank also recorded significant improvements, while SBI, PNB and Bank of Baroda posted more moderate increases.

The historical experience reinforces the importance of funding costs, loan composition and the speed at which lending rates reset.

What investors will watch next

The RBI's latest move changes the backdrop for both banks and borrowers.

For lenders, the crucial question will be whether higher lending yields translate into stronger margins without a corresponding increase in funding costs or credit stress. For borrowers with floating-rate loans, meanwhile, the higher repo rate can translate into increased borrowing costs and higher EMIs.

Bank stocks initially faced pressure after the policy announcement, but financial shares subsequently recovered, with several lenders moving higher as investors assessed the potential earnings impact of the decision.

The Morgan Stanley estimates therefore provide a framework for identifying potential beneficiaries, but the actual performance of individual banks and HFCs will depend on deposit pricing, loan repricing, credit growth and the RBI's future policy path.

With the repo rate now at 5.50%, the focus shifts from whether rates would rise to how long the tightening cycle may continue and which lenders are best positioned to absorb the change.