Banks Q2 preview: PAT likely to fall 7-8% amid lower treasury gains, decline in NIMs

Banks

Banks are expected to report a fall in the profit after tax (PAT) for the fiscal second quarter on declining the net interest margins (NIM) and moderation in the treasury gains, brokerage firms have said.

Motilal Oswal Financial Services expects a 7.3 percent decline in private banks’ PAT in the September quarter from the year-ago period and 6.7 percent sequentially. Their pre-provisioning operating profit (PPoP) is likely to decline 2 percent YoY and 18 percent (QoQ), it said in a report.

“PSU banks’ PAT is likely to decline 7.1 percent YoY (down 1.9 percent QoQ) in 2QFY26E, owing to a decline in NIMs and moderation in treasury gains for most PSBs, barring PNB,” Motilal Oswal report added.

Emkay Global Financial Services expect HDFC Bank, ICICI Bank, Indian Bank, and RBL Bank to be outliers, while Axis Bank, Federal Bank, Bandhan Bank, Canara Bank and Union Bank of India are likely to report a softer quarter due to weak margins and elevated credit costs.

Several analysts expect margin compression to continue during the third quarter, as the full impact of the 100 basis points (bps) rate cut by the Reserve Bank of India (RBI) may take time till December to be absorbed.

Interest rate cuts have an immediate impact on banks' lending rates, particularly for loans, the adjustment to deposit rates tends to lag significantly, resulting in a compression of NIMs.

The impact of June’s 50 bps rate cut on banks’ lending yields may be fully reflected this quarter, while the moderation in cost of funds will happen with a lag.

Axis Securities Equity Research report cautioned investors to expect larger private banks to witness NIM compression of 10 bps (+/-2bps) QoQ, while their mid-counterparts are expected to report a drop in the 10-15 bps range.

State-owned banks are expected to do better, contracting around 10 bps QoQ. The pain will continue for small finance banks (ex-Ujjivan), with Equitas Small Finance Bank reporting sharper margin compression as compared to AU Small Finance Bank, the Axis Securities report added.

Credit growth

Provisional numbers show state-owned lenders outpacing private banks in the growth of advances. State-owned banks’ advances grew 10.7-16.87 percent YoY against 6.5-16.67 percent for private sector lenders.

Most brokerages expect PSU banks to deliver only about 11 percent YoY credit growth, just marginally ahead of the industry figure.

“We would watch out for management optimism on growth pick-up likely from H2FY26, supported by GST-rate rationalisation driving consumption demand, further supported by income tax rate cut and pick-up in unsecured credit as headwinds ease gradually,” Axis Securities said.

On October 10, Moneycontrol wrote that the recent reduction in the Goods and Services Tax (GST) has sparked a surge in consumer spending, with state-owned banks witnessing robust demand for retail loans, particularly in vehicle and consumer durable segments during the ongoing festival season.

The spike in retail demand is driving overall credit growth across the financial system and could surpass 10–12 percent growth projection for the current fiscal, experts said.

Deposit growth

Even though mobilising deposits remains a task, private banks have beaten state-owned lenders on this front, Moneycontrol’s analysis of provisional numbers shows.

Private banks’ deposit growth remained in the 7.1-15.1 percent range YoY, higher than 9.28-12.13 percent registered by state-owned lenders.

Banks have been struggling with deposit mobilisation over the past few quarters, especially on the CASA front, due to unattractive interest rates compared to relative to other financial products.

“We expect  our coverage universe banks’ deposit growth to mirror credit growth and stand at ~11 percent YoY,” Axis Securities said.

Asset quality

Fresh slippages would remain elevated for banks, IDFC First Bank, RBL Bank and IndusInd Bank, with high exposure to unsecured retail and microfinance, though lower than the already elevated levels in Q1, Yes Securities said in a report.

In general, slippages have been moderately on the rise sequentially due to economic slowdown but Q2 may be flattish to slightly higher, it said. Sequential evolution of provisions would be a function of not only slippages but also of recoveries and upgrades and pre-existing provision buffers.

“Unsecured retail stress shows early signs of easing, but challenges persist in cyclical sectors like CV loans and MSMEs, with credit costs expected to normalise in 2HFY26,” Motilal Oswal report said. “Large private banks with more diversified and secured portfolios continue to fare better. We expect stable asset quality trends for PSU banks, aided by controlled slippages and robust PCR.”