ANALYSIS 6 of 7 private banks face slump in operating profits, margins in Q4 FY25

Private banks face slump in operating profit amid margin decline in Q4 FY25

In a rare setback for India’s private banking sector, several leading banks reported declining margins and weak operating profits in Q4 FY25, a period that is traditionally marked by strong performance due to credit demand and year-end financial activity.

For the first time in many years, nearly all private lenders, except Yes Bank, experienced weak operating profits and a 20-40 basis point (bps) compression in net interest margins (NIMs) in the March quarter. Industry-wide credit growth decelerated to approximately 11 percent in FY25, down from 16.5 percent in FY24.

The decline stemmed from weaker demand in specific loan segments and deliberate efforts by banks to reduce elevated loan-to-deposit ratios. Moreover, this trend may persist, with Motilal Oswal forecasting that credit growth will remain subdued at around 12 percent in FY26.

Leading private banks did see growth, but largely in the single to low double-digit range, a sharp contrast from their typical 15-20 percent expansion.

Per investor presentations and financial disclosures, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, RBL Bank, IDFC First Bank, and Yes Bank have seen operating profits either stagnate or decline due to shrinking NIMs and rising funding costs.

HDFC Bank in Q4 FY25 reported an operating profit of approximately Rs 25,500 crore, up modestly from Rs 24,223 crore in the year-ago period, while its NIM (on total assets) declined to 3.54 percent  from 3.65 percent in FY24.

Axis Bank faced a tougher quarter, with its Q4 FY25 operating profit at Rs 10,500 crore (slightly up from Rs 10,238 crore in Q4 FY24), while the NIM dropped to 3.8 percent from 4.02 percent.

ICICI Bank, on the other hand, reported an operating profit of Rs 12,500 crore (up 15 percent sequentially) in Q4 FY25, compared to Rs 11,871 crore in the year-ago period. However, here too, the NIM was down to 4.27 percent in Q4 after peaking at around 4.5 percent in the same period last year. The bank’s management, during a press interaction, said the margin is likely to be in the low-4 percent range going forward, as the rate environment normalises. That is, while we shouldn’t expect much expansion in the NIM, a sharp decline is not on the cards either.

Kotak Mahindra Bank, too, reported a particularly weak Q4 FY25, with the operating profit flat at Rs 5,472 crore, unchanged from Rs 5,472 crore in Q4 FY24. Its NII (net interest income) rose 5 percent to Rs 7,284 crore from Rs 6,937 crore, but the NIM fell sharply to 4.97 percent from 5.28 percent, contributing to a 14 percent decline in the net profit, which shrank from Rs 3,552 crore from Rs 4,133 crore.

Relatively smaller lenders such as RBL Bank and IDFC First Bank faced steeper challenges, with profits and margins plunging even further.

RBL Bank struggled significantly, with its Q4 FY25 operating profit at Rs 1,200 crore (down from Rs 1,500 crore in Q4 FY24), and its net profit down to Rs 68 crore from Rs 353 crore. Its NIM declined to 4.89 percent from 5.12 percent.

With challenges in the microfinance segment, IDFC First Bank had an  operating profit of  Rs 1,618 crore, up 8.7 percent from Rs 1,489 crore in Q4 FY24, but its net profit dropped 58 percent to Rs 304 crore from Rs 724 crore. The NII grew 9.8 percent to Rs 4,907 crore from Rs 4,469 crore, and the NIM fell to 5.95 percent from 6.09 percent.

Yes Bank, however, bucked the trend, with its Q4 FY25 operating profit at Rs 1,800 crore (up from Rs 1,500 crore in Q4 FY24), and its net profit up 63.3 percent to Rs 738 crore from Rs 452 crore. Its NII rose 5.7 percent to Rs 2,276 crore from Rs 2,153 crore, with the NIM improving to 2.5 percent from 2.4 percent.

According to what the management of several of these banks said, this quarter revealed significant margin pressure, exacerbated by a cumulative 50 bps cut in the repo rate  in February and April 2025, and an expectation of another 25 bps cut in June 2025.

These cuts by the Reserve Bank of India (RBI), aimed at supporting growth amid cooling inflation, have lowered borrowing costs but squeezed lending margins, contributing to the sector’s operating profit challenges.

Moreover, these reductions have also prompted banks to withhold any FY26 guidance, as reported earlier by Moneycontrol. However, a common view among the management has been that the anticipated  25 bps cut in June is expected to lower lending rates faster than deposit rates, posing further  risk to NIMs and profitability.

Analysts have noted that the rapid repricing of loans under the External Benchmark Lending Rate (EBLR) regime, compared to slower deposit rate adjustments, would likely pressure margins further in FY26.

The management of banks have also attributed the NIM compression to rising deposit rates. As banks vied to bridge the credit-deposit gap by offering higher interest rates, it led to a NIM compression of 30–40 bps, with Kotak Mahindra and IDFC First Bank seeing significant declines, as mentioned earlier.

Some banks, however, attributed the decline to sector-specific stress. For instance, IDFC First’s 28.3 percent microfinance portfolio contraction, and higher operating expenses (12.2 percent on-year rise) eroded gains. RBL, too, said it grappled with unsecured lending challenges, necessitating higher provisions.