With the transmission of the repo rate cuts nearly complete across banks, lenders are likely to report muted margin growth in the first quarter of financial year 2026-27 as they are forced to offer higher prices to attract deposits given the lag between the loan growth of 17.7% and the 12% incremental deposit mobilisation, according to analysts.
This will have a system-wide net profit growth of annualised 9.6% but a likely decline of 4% sequentially, Motilal Oswal said in first quarter preview Thursday.
“On the profitability front, they estimate net interest incomes to improve by 10.9% on-year and 3.5% quarter-on-quarter (QoQ) system-wide. Private banks’ net income to grow by 10.1% YoY/fall by 1.7% sequentially while for PSUs net income will grow 9% YoY and likely to decline by 6.6% QoQ. System-wide net income to grow by 9.6% YoY and fall by 4% sequentially,” Motilal analysts said.
According to them, margins (net interest margin) of state-run banks are likely to remain range-bound in the first quarter as the external benchmark-linked loans have largely absorbed the full rate cut impact. Going forward, changes in product mix are likely to be the key driver of yield movements. A few banks have changed the deposit rates already.
Among mid-sized private sector banks, they expect margin expansion for IndusInd Bank, Federal and DCB, while their larger peers like HDFC Bank, ICICI Bank and Axis Bank are likely to report a marginal decline in NIMs, while Kotak Bank will see moderation and NIMs are likely to decline 13 bps sequentially. Overall margins are likely to remain stable in a narrow range.
Meanwhile, credit growth touched 17.7% (as of June 15) in the reporting quarter led by mid-sized private banks. This higher loan demand is driven by higher working capital demand amid rising input costs; the regulatory shift in focus from LDR to the LCR/NSFR framework, and a surge in corporate borrowings following the rise in bond yields.
“However, we expect growth to likely moderate to around 14% for the full fiscal. We expect banks to deliver loan growth of 1.2-5.4% sequentially in Q1. State-run banks are likely to remain relatively subdued with less than 3% growth, while mid-sized private banks such as AU, RBL, DCB, and IDFC are expected to outperform with loan growth of 3.9-5.4% while ICICI Bank to lead with around 4% loan growth among large private players,” they said.
On the other hand, deposit growth stood at 12% aided by an increase in the money multiplier but continues to trail loan growth, resulting in greater reliance on wholesale deposits. With competition for deposits still intense, banks continue to face challenges in mobilizing low-cost deposits.
The brokerage expects term deposit rates to remain broadly sticky as banks strive to sustain deposit accretion. The recently announced FCNR route should provide some relief and help deposits mobilization till September.
On the asset quality front, their outlook remains healthy with most banks indicating that stress is easing in the unsecured loan segment like personal loans and credit cards, while MFI stress is closer to normalization.
“Our channel checks suggest no immediate impact of the West Asia war, though we expect the rise in input costs and margin contraction to dent profit margins of underlying borrowers,” they said.
