The profitability of banks in the first quarter of the current financial year is expected to remain under pressure due to margin compression, weak fee income and elevated credit costs, according to the brokerage firms.
Some brokerages expect banks’ profits to grow modestly, in the range of 3-4 percent on-year, but others believe that on a quarterly basis, a decline is expected. In fact, they feel there could be 4-8 percent on -year decline in profit after tax (PAT).
However, the decline in profitability can be offset by the higher treasury gains, brokerages added.
“We expect Q1FY26 to be another quarter of weak earnings with 8 percent year-on-year PAT decline for our coverage banks, on the back of a 6 percent year-on-year decline in Q4FY25,” analysts at JM Financial said in a report dated July 6.
On its part, Motilal Oswal Financial Services in a report said that it expected state-owned banks’ PAT growth to moderate sharply to 4.8 percent on-year (down 11.7 percentage points on-quarter), amid a decline in net interest margins (NIMs), normalised operating expenses and higher provisioning required given that in the previous three-month period—Q4FY25, or the last quarter of the previous financial year—had seen the benefit of a one-time reversal in provisions on SRs or security receipts.
For private banks, Motilal Oswal’s report said PAT was likely to decline 2.5 percent on-year (up 2.8 percent sequentially).
The pressure on NIMs has increased due to a downward repricing of External Benchmark Lending Rates (EBLR) amid frontloading of a rate cut by the Reserve Bank of India (RBI) in the last three monetary policies. Usually, when the central bank cuts the repo rate, EBLR loans automatically get adjusted accordingly, putting pressure on banks' margins.
From the February monetary policy till June, the central bank has cut its policy repo rate by 100 basis points (bps) to aid growth.
“Banks will see a sequential decline in NIM as the impact of the RBI’s 100 bps repo rate cut between February-25 to June-25 will result in reduction in the yield on advances,” Yes Securities said in a report.
The brokerage added that banks would benefit from the first phase of savings account and fixed deposit rate cut (effective from April 2025) while the benefit of the second phase of savings account rate cut (effective from June 2025) would be contained and will be reflective in Q2FY26.
Deposit growth
Analysts have pegged banks’ deposit growth to remain muted in the April-June quarter of FY26 as the seasonal flows of Q4FY25 have lessened and given the persistent stress on mobilising low-cost current and savings account (CASA) deposits.
The pressure on CASA deposits was seen in the provisional numbers reported by banks. According to Moneycontrol’s analysis of eight banks that have released provisional numbers, three have reported a CASA growth between 2 and 7 percent, and two reported a fall on a quarterly basis.
The banks that have reported a fall in CASA deposits are Indian Bank and CSB Bank. Tamilnad Mercantile Bank, South Indian Bank and Karur Vysya Bank posted a rise.
However, all these banks have reported a 4-9 percent growth in CASA on a yearly basis.
Motilal Oswal in the report said that with a sharp decline in policy rates, banks are reducing both savings account and term deposit rates. Savings account rates have declined by 25-100 bps since April 2025 and term deposit rates have fallen by 20-100 bps in the past two months.
Loan growth
Brokerages expect banks' loan growth to ease in Q1FY26 as credit growth remains tepid. “Loan growth to moderate at 10.8 percent year-on-year, from 12.6 percent in Q4FY25,” JM Financial said in its report.
As per provisional numbers, banks reported anywhere from 9 percent to 36 percent growth in credit on a yearly basis. On a quarterly basis, loan growth rose moderately, by 2-6 percent.
Typically, banks see slower loan and deposit growth in Q1 due to cyclical factors and large base in Q4. However, Q4FY25 was also weak due to a significant slowdown in unsecured and small-ticket loans amid stress in the portfolio.
Asset quality
Banks' asset quality, which had been looking up in the last few quarters, may see a hurdle in Q1FY26 due to an expected rise in fresh slippages in the unsecured retail and fresh slippages portfolios.
Additionally, an anticipated rise in credit cost, especially in unsecured lending, will keep asset quality under check in the April-June quarter.
“Unsecured retail (MFI) continues to witness elevated stress levels. We thus expect the credit cost differential to persist. Large private/PSU banks should continue to report controlled credit costs, while mid-size lenders with higher exposure to Retail/MFI segments are expected to report elevated provisioning levels, mainly during the first half,” the Motilal Oswal report said.
In Q4FY25, state-owned banks beat private banks on asset quality due to lower incremental slippages, recoveries and upgrades.
According to a CareEdge report, as of March 31, 2025, gross non-performing assets or NPAs of state-owned banks had improved significantly, declining by 17 percent on-year to Rs 2.94 lakh crore, reflecting the continued strengthening of asset quality. On the other hand, gross NPAs of private banks had risen by 5 percent to Rs 1.21 lakh crore as on March 31, 2025.
Net NPAs of state-owned banks improved, falling by 23.3 percent on-year to Rs 0.60 lakh crore as on March 31, 2025, while net NPAs of private banks increased by 13.6 percent on-year to Rs 0.33 lakh crore, driven by stress seen in the microfinance and unsecured segments.
Treasury gains
Gains from the treasury for banks will be a key focus area in the current quarter because of the falling yield on bonds after the RBI's rate cut and foreign exchange trades executed during the quarter.
Usually, a repo rate cut by the central bank reduces the yield on government securities, helping banks gain on their investment in these instruments. A fall in bond yield leads to a rise in bond prices due to an inverse proportionality.
In Q1FY26, the central bank reduced the repo rate by 75 bps to support growth, with 25 bps in April and 50 bps in June. However, government bond yields dropped by only 20 bps.
Experts said state-owned banks, which were the major participants in the open market operations purchase auctions conducted by the RBI, are expected to gain the most in terms of treasury income.
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