Shares of three major private lenders: Axis Bank, IndusInd Bank, and Kotak Mahindra Bank have declined sharply by as much as 10 percent in the past month as muted June quarter (Q1FY26) performance weighed on investor sentiment. Sluggish credit growth and margin contraction dragged earnings, forcing the Street to trim its bets on these banks. In contrast, heavyweights HDFC Bank and ICICI Bank managed to hold steady, reporting relatively resilient numbers that helped them trade flat to positive.
Looking ahead, analysts expect the near-term outlook for private banks to stay subdued. The full impact of the 50 basis points repo rate cut is still to play out, while credit growth is yet to show meaningful acceleration.
Mahesh Patil, CIO of Aditya Birla Sun Life AMC, said, “Margin compression is yet to show its full impact. Earlier, deposit growth was the sector’s challenge, but now the spotlight has shifted to credit growth, which is still not showing meaningful acceleration. Once this normalises, private lenders can stage a stronger performance as the year progresses.”
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Private banks reported muted performance in Q1 as net interest margins (NIMs) came under pressure from repo rate cuts. This trend is expected to persist into Q2, before improving in the third quarter as deposit repricing begins to stabilise margins.
Business growth in Q1 also remained modest, with deposit growth outpacing advances across most large private banks. While loan demand has improved after the rate cuts, margin pressure and elevated provisioning continue to act as drags.
Manoj Bahety, founder and fund manager at Carnelian Asset Management, added, “Margins are expected to remain soft over the next few quarters as repo cuts pass through and liabilities get repriced. For those looking to play private banks, credit growth will be the key factor to watch. In a benign liquidity environment, we expect loan growth to return to the system and fee-based income to provide additional support to profitability.”
Mutual fund houses have also turned cautious, staying underweight on private banks after a muted earnings season. Data from JM Financial showed that as private lenders account for 28 percent of the Nifty’s index weight and contribute nearly 37 percent of its profits, June quarter performance was weak, with net profit growth in low single digits.
Among individual lenders, HDFC Bank reported advances of Rs 26.53 lakh crore in Q1FY26, up 7 percent year-on-year. While growth was slower than anticipated, management reiterated that credit expansion would remain in line with industry trends this fiscal.
Meanwhile, PSU banks outshone private peers—Bank of Baroda reported a 13 percent rise in advances, with Bank of India and Bank of Maharashtra also delivering healthy growth supported by decent CD ratios and excess statutory liquidity ratio (SLR).
For now, investors remain wary of the sector. With earnings pressure visible and credit growth still to pick up, the Street is keeping a close eye on whether the second half of the year brings relief for private banks.
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