Daijiworld Media Network – New Delhi
New Delhi, Jul 10: The Indian banking sector is witnessing a steady rise in deposit inflows, signaling improved liquidity conditions. However, the upcoming Q1FY26 results may reflect a squeeze on core earnings as Net Interest Margins (NIMs) are expected to dip year-on-year, according to a report released by Phillip Capital.
The report indicates that while systemic deposit growth is gaining momentum, the overall credit growth remains tepid, with a sequential rise of just 0.4 per cent so far. This has slightly improved the credit-to-deposit (C/D) ratio, but the decline in NIM is likely to offset some of the gains.
According to projections, the banking sector’s Net Interest Income (NII) is expected to grow merely 1 per cent YoY, and may fall 1.5 per cent QoQ, as credit demand remains moderate. The report also suggests that sector-wide NIMs may contract by 30 basis points (YoY) and 10 basis points sequentially, primarily due to the stable cost of funds and diminishing returns from repo-linked loans.
Private sector banks have reported relatively better metrics, with loan growth of 0.5 per cent QoQ and deposit growth at 1.3 per cent QoQ, bringing their C/D ratio to 92 per cent—a decline of 0.8 per cent. However, despite stronger fundamentals, private banks are expected to log a 1.9 per cent YoY and 0.8 per cent QoQ decline in NII.
Public Sector Banks (PSBs), on the other hand, displayed muted loan growth of 0.2 per cent QoQ, with deposits remaining flat. The C/D ratio for PSBs held steady at 78 per cent, but they are forecast to witness a 0.3 per cent YoY and 2.4 per cent QoQ dip in NII, underscoring earnings pressure.
On the profitability front, Profit After Tax (PAT) across the banking universe is expected to register a modest 3.5 per cent YoY and 0.8 per cent QoQ increase, largely supported by lower credit costs and improving asset quality. PSBs are projected to record 7 per cent YoY growth in PAT but may face a 4.1 per cent sequential decline, while private banks are expected to see 1.4 per cent YoY and 4.2 per cent QoQ growth in profits.
Credit costs are estimated to ease to 59 bps in Q1FY26, compared to 64 bps in Q4FY25, though slightly higher than 52 bps reported in Q1FY25. The trend reflects continued stability in asset quality but hints at a cautious approach by lenders.
Despite the tailwinds from growing deposits and improving asset performance, the report cautions that margin pressure and sluggish credit offtake will be key headwinds for the sector. Analysts believe that the real test for banks will be sustaining earnings amid tightening spreads and a high-interest-rate environment.