Analysts see the quarter as a crucial inflection point, with early signs of recovery driven by easing deposit costs, stronger balance sheets, and a supportive liquidity environment.
Looking ahead, private bank earnings are projected to rebound sharply in FY27, with growth expected to accelerate to 21.7% from 6.9% in FY26. (Source: freepik)
India’s banking sector is likely to turn a corner in the third quarter of FY26, following a muted first half weighed down by falling loan yields and margin pressure, said Motilal Oswal Institutional Equities on Thursday. Analysts see the quarter as a crucial inflection point, with early signs of recovery driven by easing deposit costs, stronger balance sheets, and a supportive liquidity environment.
Private and public sector banks are now in a transition phase, as the lagged benefits of deposit repricing and improving asset quality begin to reflect in earnings. While the recovery may be gradual, it is expected to set the stage for a stronger FY27, marked by a return to double-digit profit growth.
Also read: SBI to raise Rs 20,000 crore via issue of bonds to domestic investors
According to the report, loan yields have continued to soften at the system level. However, private banks have shown more agility in pricing, managing a month-on-month rise in the weighted average lending rate (WALR) on fresh loans. In contrast, public sector banks recorded a sharper 30-basis-point decline over a three-month span.
On the deposit front, several banks have trimmed savings and term deposit rates by 20–100 basis points across tenors. The full impact of these cuts is likely to be felt in the second half of FY26, helping stabilise net interest margins (NIMs) after a period of sustained compression.
With repo rate cuts behind and liquidity support expected to continue, banks are better positioned to protect margins and lift profitability. At the same time, stress in unsecured retail and microfinance segments has started to ease, opening the door for potential provision write-backs and improved credit cost discipline, the report said.
Further, CASA ratios have declined across the board, but banks with robust deposit franchises are holding up better in managing cost pressures as the value of a strong liability profile is once again becoming evident.
Motilal Oswal projects pre-provision operating profit (PPoP) for private banks to rise from Rs 69,800 crore in Q1 FY26 to Rs 83,100 crore by Q4 FY26, pointing to a broad-based improvement in core earnings.
Looking ahead, earnings growth for private banks is forecast to accelerate sharply to 21.7 per cent in FY27 from 6.9 per cent in FY26, backed by margin recovery and lower provisioning requirements.
By continuing you agree to our Privacy Policy & Terms & Conditions
