Advertisement
Indian banks are set to report subdued earnings for the first quarter of FY26, impacted by weak loan growth, falling net interest margins (NIMs), and seasonally low fee income. According to IIFL Capital, profits after tax are expected to decline 2% year-on-year and 4% quarter-on-quarter. Loan growth dipped to 9.6% year-on-year, with MSME lending being the only bright spot. Margins are expected to compress further in Q2, before stabilising by Q3. Despite improved liquidity, sluggish business momentum and rising slippages are putting pressure on overall banking performance.
Indian banks are heading into a tepid earnings season for the first quarter of FY26, as muted credit demand and narrowing margins weigh on their profitability. A report from IIFL Capital has flagged that banks' profit after tax is projected to fall 2% year-on-year and 4% quarter-on-quarter, largely due to weak business momentum and rising pressure on spreads. Advertisement
Loan growth across the system dropped to 9.6% compared to 11% in the preceding quarter. In fact, quarter-to-date figures show loan growth was just 0.4% until mid-June significantly below the typical 1.5-2% seen in first quarters of past years. Apart from MSME lending, which grew in mid-teen percentages, most segments underperformed. Non-Banking Financial Company (NBFC) lending was flat, vehicle loans climbed a modest 6%, and housing and unsecured loans increased by just 9%. Large corporate credit growth barely moved at 1%.
This overall slowdown is also reflected in banks' shrinking margins. IIFL expects net interest margins to contract between 8 to 25 basis points quarter-on-quarter, driven primarily by a fall in loan yields by 10-20 basis points. Despite a reduction in deposit rates with savings account rates down by 20-350 basis points since December 2024 the benefit has been insufficient to offset the hit from falling loan yields.
Liquidity conditions, however, improved noticeably. The banking system shifted from a liquidity deficit of INR 1.7 trillion in the previous quarter to a surplus of INR 2 trillion. Still, this surplus has not translated into higher lending, which remains weak, dragging down spreads by 9 basis points for public sector banks and a sharper 26 basis points for private banks till May.
The fee income typically sees seasonal softness during the first quarter, and this year has been no different. Combined with persistent operating expenses, most banks are expected to report negative operating jaws that is, costs outpacing revenue growth which will likely result in flat core pre-provision operating profits.
Credit costs, too, are expected to rise slightly due to seasonal slippages and ageing of provisions. According to IIFL, NIMs are expected to continue contracting cumulatively by 22-35 basis points until the second quarter. Margins are, however, likely to stabilise in the third quarter and may see expansion again by the end of FY26.
Source ANI
5th Jun, 2025
25th May, 2023
11th May, 2023
27th Apr, 2023
Advertisement
Facebook
Whatsapp
