Robust credit growth of 17.7% in the first quarter — the highest in nearly two years — along with strong treasury gains and stable asset quality is expected to support banks’ profitability. However, pressure on net interest margins (NIMs) is likely to persist as much of the incremental lending has been funded through high-cost retail and bulk deposits.
“Most of the incremental bank credit growth has come from corporate credit, gold loans and NBFC lending, all lower-yielding segments, pointing to a NIM trade-off,” Nomura said in a report.
Deposit growth continues to lag credit growth, while low-cost current account savings account (CASA) ratios have declined across most banks. The banking sector recorded sequential deposit growth of 3.3% and year-on-year growth of 12 % as of June 15, according to the latest Reserve Bank of India data.
“We expect margins to see marginal compression across most banks in the first quarter of FY27, though the deposit-credit growth gap should narrow from the second quarter as incremental FCNR(B) deposits provide support,” Nomura added.
Other brokerages also expect margin compression. Kotak Institutional Equities said NIMs are likely to remain stable or decline marginally on a sequential basis as strong loan growth over the past few quarters has largely been funded through term deposits, including higher-cost wholesale deposits.
Lower slippages and continued recoveries from bad loans are expected to keep credit costs contained, particularly for public sector banks.
Banks that were hit by stress in the microfinance and small-ticket unsecured loan segments are also expected to report lower credit costs.
“Microfinance continues to improve directionally and stress accretion in the system is now at comfortable levels. Provisional business updates from lenders indicate collections improved during 1QFY27 and have normalised,” the report said.
Treasury income is also expected to improve sequentially, supported by favourable bond yield movements during the quarter.
Brokerages expect a divergence in margin performance across banks. Mid-sized private sector lenders are likely to report NIM expansion, while larger private banks may see modest compression.
Motilal Oswal Financial Services expects NIM expansion among mid-sized private banks such as IndusInd Bank, Federal Bank and DCB Bank. In contrast, HDFC Bank, ICICI Bank and Axis Bank are likely to report a marginal decline, while Kotak Mahindra Bank could also see some moderation.
Among smaller private lenders, it expects NIMs to decline by 13 basis points sequentially for AU Small Finance Bank, 10 basis points for Bandhan Bank and 14 basis points for Equitas Small Finance Bank. Margins at public sector banks are expected to remain broadly stable.
Yes Securities, however, expects margins to remain largely stable, arguing that the impact of repo rate cuts and reductions in the marginal cost of funds-based lending rate (MCLR) has largely played out, while the residual impact has been offset by the repricing of term deposits. It also noted that wholesale deposit costs have eased following liquidity measures.
Asset quality, however, could face some pressure from external developments. According to Yes Securities, fresh slippages are expected to rise marginally on a sequential basis due to supply chain disruptions arising from the West Asia conflict, the lingering impact of US tariff measures and slower nominal GDP growth. Provisioning, it said, will depend not only on fresh slippages but also on one-off items recognised in the previous quarter.
Meanwhile, easing competition for deposits could improve pricing.”PSU banks have largely exhausted their credit-deposit ratio headroom and their cost of funds is converging with that of private banks. This should reduce the aggressive loan pricing seen in recent quarters and support margins for private banks,” Kotak Institutional Equities said.