With banks gearing up to announce their financial results for the second quarter, analysts predict this to be their weakest quarter of the earnings cycle. This is largely due to muted loan growth, compressed net interest margins, weak core fee income and lower treasury gains, reports said.
“We expect overall profitability growth for PVBs (private sector banks) to remain subdued at ~2% YoY, mainly due to moderate growth, margin contraction, and slightly elevated credit costs,” Emkay Global said in a pre-earnings report. “PSBs should report healthy core operating performance as well as contained credit cost, but weak treasury performance in view of sequential uptick in g-sec yields should limit profit growth at aggregate level to ~1.2% YoY,” it said.
Why banks face a margin & profit squeeze
Net interest income (NII) of banks is expected to remain flattish on year as well as on a sequential basis for the quarter ended September, brokerages said. “NII growth is expected to slow compared to average loan growth because yields on advances are falling faster than funding costs, which will negatively impact PPoP (pre-provisioning operating profit) and overall earnings for lenders, especially public and private banks with high MFI (microfinance) exposure,” YES Securities said.
In the case of net interest margins, analysts believe that they have largely bottomed out and will improve in the subsequent quarters and visible improvement would be seen by Q4FY26. However, if there is a 25-basis points repo rate cut in the December, NIM bottoming-out and recovery could get pushed out by a quarter or so.
With the gap between credit growth and deposit growth narrowing, brokerages expect bank credit growth to be around 10-10.3% on year while the deposit growth at 9.8-10% on year. Recently, CareEdge in a report said that the CD ratios of banks crossed 80% for the first time in FY26.
Credit growth and emerging asset quality trends
The muted loan growth is largely due to slowdown in the corporate and unsecured retail lending and in the case of deposits it is due a run-down in bulk deposits, reports said. Post recent GST and lending rate cuts, analysts expect some pick-up in retail credit growth in the second half, led by mortgages and vehicle loans, partly offset by some risk-off growth approach in MSME segment. Other steps such as the reduction in cash reserve ratio, relaxation in norms for bank exposure to capital market entities would also aid credit growth.
In terms of asset quality, analysts expect improvement in slippages on a sequential basis due to reducing stress in the unsecured retail segments, including microfinance. “We expect 10-25% QoQ improvement in MFI slippages. We also see material improvement in fresh stress formation (SMA loans) in MFI segment,” ICICI Securities said in its report. In the previous quarter, banks had said that they were seeing improvement in unsecured personal loan stress and stress in the credit card segment.
However, analysts will be watchful of the rising stress in commercial vehicle, business banking and small ticket loan-against property segments. Management comments on the export-oriented MSME segments would also be a key monitorable.