The brokerage attributes the expected weak performance to slower credit growth, a 30 basis point year-on-year compression in net interest margins (NIMs), tepid fee income and higher credit costs.
As of mid-June, overall bank credit growth stood at around 10 per cent, down from over 12 per cent in the March quarter. (Source: freepik)
India’s banking sector is set for another quarter of subdued earnings performance, with a projected 8 per cent year-on-year drop in net profit for the April-June period (Q1 FY26), according to a report by JM Financial Institutional Securities. This comes on the heels of a 6 per cent decline in profit in the previous quarter (Q4 FY25), signalling persistent pressure on profitability amid slowing loan growth and narrowing interest margins.
The brokerage attributes the expected weak performance to a combination of factors including slower credit growth, a 30 basis point year-on-year compression in net interest margins (NIMs), tepid fee income and higher credit costs. These pressures are only partially offset by strong trading gains.
As of mid-June, overall bank credit growth stood at around 10 per cent, down from over 12 per cent in the March quarter. JM Financial estimates that its coverage universe of banks will report loan growth of 10.8 per cent in Q1 FY26, compared to 12.3 per cent in Q4 FY25. Deposit growth has remained muted as well at 10.4 per cent year-on-year, with current and savings account (CASA) balances showing even weaker growth.
The sharp cut in benchmark interest rates -- 100 basis points in this cycle -- has led to quicker repricing of loans linked to external benchmarks like the repo rate, squeezing NIMs. JM Financial expects net interest income (NII) growth for its coverage banks to come in at just 2% year-on-year in Q1.
Further, asset quality, particularly in the unsecured lending segments such as personal loans and credit cards, remains a key concern. While large private banks like ICICI and Axis are expected to manage credit costs better due to robust provisioning buffers, mid-sized and small finance banks with higher exposure to unsecured lending could see higher slippages and provisioning.
Even though near-term headwinds persist, the report notes that bank valuations remain attractive, trading close to their long-term averages. A sustained revival in credit growth, better deposit mobilisation, and stable asset quality could trigger a re-rating for the sector in the months ahead.
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