At a time when interest income growth was sluggish and margins constrained, treasury income became the saviour for public sector banks (PSBs) in the first quarter of the current financial year.
PSBs logged a net profit of Rs 44,218 crore in Q1FY26, registering an 10.6% year-on-year growth, according to data from Capitaline. State Bank of India constituted 43% of the overall net profit at Rs 19,160 crore. On a sequential basis, the net profit of PSBs was down 8.6%.
The PSB’s other income, which includes treasury gains, jumped sharply to Rs 48,996 crore in Q1FY26 compared to Rs 34,416 crore in the year-ago quarter. To specify, large banks such as Bank of Baroda’s other income was up 88%, and SBI clocked a 55% on-year growth in the first quarter. However, the ‘other income was down 16% sequentially.
“It is mainly the treasury income, which supported most public sector banks in Q1FY26. They offered their bond portfolio in the RBI’s open market operations, and they were able to register some gains on the HTM portfolio added with profits from the AFS portfolio,” said Anil Gupta, senior vice president & co-group head – financial sector ratings at ICRA.
Profit Leaders and Margin Pressures
Among PSBs, Indian Overseas Bank saw highest year-on-year growth in net profit, rising 75% to Rs 1,111 crore. Punjab & Sind Bank follows by reporting a growth of 48% at Rs 269 crore. Bank of Baroda and Canara Bank clocked a net profit of 2% and 22%, respectively.
“Overall, they have been able to hold on to their profitability. Although the Net Interest Margin (NIM) shrank, PSBs were able to protect their margins to some extent due to lowering deposit rates, which is positive,” said Saurabh Bhalerao, associate director and head of BFSI research at CareEdge.
NIM of state-owned lenders fell 17 basis points in the reporting quarter, mirroring the impact of repo rate cut. Punjab & Sind Bank had the highest impact, with its NIM plunging 67 bps on quarter. SBI and Bank of Baroda had an impact of 10 bps and 7 bps on their margins, respectively.
“The NIM trajectory will be U-shaped. We have seen moderation in Q1 and expect some pressure in Q2 as deposit costs have peaked. But with benefits from the cash reserve ratio (CRR) cut and deposit repricing, margins should recover by Q4,” C S Setty, chairman, SBI, said in the post-earnings press conference.
Loan Growth Outpaces Deposits
Most PSBs reported a muted growth in the net interest income. SBI’s net interest income (NII) fell marginally to Rs 41,072 crore in Q1FY26, and Bank of Baroda reported a 1.4% decline in the NII to Rs 11,435 crore during the same period.
Bhalerao added that decrease in provisions also slightly aided some lenders’ bottomline. The provisions of PSBs fell 6% on year and 11% on quarter. On the contrary, large banks such as SBI and Bank of Baroda showed a sharp increase in provisions on a yearly basis. Asset quality has improved with GNPA and NNPA falling to 2.74% and 0.50% in Q1FY26. For comparison, GNPA and NNPA were 2.84% and 0.53% in the previous quarter, respectively.
Coming to assets and liabilities, loan growth outpaced the deposit growth for PSBs in Q1FY26. Loans grew at 11.4%, while deposits of the bank rose by 10.1%. Most state-owned banks managed to post double-digit loan growth for the quarter, outperforming their private sector peers. However, the growth was muted on a sequential basis.
Garnering low-cost current account, savings account (CASA) deposit continues to be a challenge for lenders. The CASA ratio declined to 38.74% in Q1FY26 from 40.01% in the year-ago quarter.
In the coming quarters, the margins will continue to be under pressure as the complete transmission is yet to happen, said Bhalerao. Analysts expect Q2 to be weak on account of muted credit growth and further NIM compression. Besides, treasury gains will unlikely to support the lenders as yields have hardened.