India's banks are heading into the June-quarter (Q1FY27) earnings season with strong loan growth and resilient core operating performance. But lower treasury income, pressure on net interest margins and higher provisioning are expected to cap profit growth, underscoring the challenge of sustaining earnings as funding costs remain elevated, analysts said.
The reporting season began on Friday with results from Indian Bank and Bank of Maharashtra. Investors will now turn to Union Bank of India on Wednesday, Federal Bank on Friday, followed by heavyweight private lenders HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and Yes Bank on Saturday.
Brokerage Antique Stock Broking expects banks to report 5% year-on-year growth in net profit for the June quarter, with private banks posting 11% growth while public sector banks' earnings decline 2% because of a one-off provision at Bank of Baroda towards the settlement of its United Arab Emirates litigation.
Excluding that impact, PSU banks are expected to deliver 12% earnings growth, driven by healthy operating performance, though lower treasury income and higher provisions are likely to weigh sequentially, Antique said.
Loan growth stays ahead
Despite a seasonally weak quarter and headwinds from the US-Iran war, banks continued to expand their loan books faster than they gathered deposits, widening the funding gap as lenders compete aggressively for liabilities, industry experts said.
Bank lending stood at ₹215.5 trillion as of 15 June, up 17.7% from a year earlier, while deposits stood at ₹258.4 trillion, up 12%, according to the latest Reserve Bank of India (RBI) data.
Early business updates showed most large and mid-sized banks reported year-on-year credit growth of 12.9-21.3%, while smaller lenders such as Jammu and Kashmir Bank and Dhanlaxmi Bank posted growth of 25.5-26.5%.
Deposit growth, by contrast, ranged between 7.0% and 14.9% for mid-sized and large banks, rising to 16.8-17.1% for some smaller lenders. Union Bank was an outlier, with loans growing 12.5% year-on-year in the April-June quarter while deposits rose just 3.5%.
Motilal Oswal Financial Services expects system-wide credit growth to continue supporting business expansion. However, it said margins are likely to remain under pressure as banks increase corporate lending, which typically carries lower yields than retail loans, while funding costs remain elevated.
According to InCred Equities, net interest margins (NIMs) are expected to remain range-bound with a negative bias during the quarter because of a higher share of corporate lending and sluggish retail credit demand.
Antique Stock Broking also expects margins to decline for most banks as the benefit from repricing term deposits is offset by faster growth in lower-yielding corporate loans, elevated bulk deposit costs and seasonal interest reversals from agricultural loans.
Among large private lenders, HDFC Bank is expected to report broadly stable margins, while ICICI Bank and Axis Bank may post a marginal sequential decline. PSU banks, meanwhile, are expected to report largely stable margins.
Asset quality, management cues
Brokerages expect asset quality to remain broadly stable despite seasonal stress in agricultural lending, with only a modest increase in credit costs.
Antique expects gross slippages to inch up sequentially because of higher agricultural loan slippages, but said stress in unsecured retail and microfinance portfolios continues to ease.
InCred also expects asset quality to remain largely stable, although seasonal pressure is likely in agriculture, affordable housing and vehicle finance portfolios. YES Securities expects credit costs to remain contained through FY27 and does not foresee any material increase despite risks from geopolitical tensions in West Asia and weather-related disruptions.
Deposit growth improved during the quarter but continued to lag lending, keeping competition for deposits intense.
Motilal Oswal expects term deposit rates to remain broadly sticky as banks continue competing for liabilities, although the Reserve Bank of India's foreign currency non-resident (FCNR) deposit scheme is expected to provide some relief to deposit mobilization until September.
The move, announced on 5 June as part of a broader package to attract dollar inflows and support the Indian rupee, allows banks to raise fresh and renew existing FCNR (B) deposits of three to five years and swap the dollars with the RBI at a concessional rate. Hedging cost for banks will be zero, effectively removing a major cost that previously prevented banks from offering attractive rates on dollar deposits. The scheme is open till 30 September.
Management commentary on deposit mobilization, funding costs and the impact of FCNR inflows is expected to be among the key monitorables this earnings season.
SBI Research said in a 10 July report that bank deposits surged by nearly ₹7 trillion during the fortnight ended 30 June, aided by quarter-end mobilization and capital inflows, including FCNR deposits. It also said commercial paper issuances and incremental bank credit strengthened during the quarter, indicating economic activity remained resilient in the first quarter of FY27.
Heading into the earnings season, brokerages continue to favour large private lenders. Motilal Oswal's preferred picks are State Bank of India, ICICI Bank, HDFC Bank and AU Small Finance Bank, while Antique prefers ICICI Bank, HDFC Bank, Ujjivan Small Finance Bank and State Bank of India.
InCred remains positive on the top three private lenders, while YES Securities favours Bank of Baroda, HDFC Bank, Kotak Mahindra Bank, Axis Bank, ICICI Bank and State Bank of India.