Banks head into Q3 earnings with strong loan growth—but deposits, liquidity in focus

Analysts have, however, cautioned that stretched liquidity conditions and weak deposit mobilization could emerge as key pressure points as loan growth continues to outpace deposits.

Leading private sector banks including HDFC Bank, ICICI Bank, and YES Bank are set to kickstart the third-quarter earnings season from 17 January.

Credit growth and liquidity pressures

Non-food credit for the banking sector grew almost 12% on year as on 15 December, according to latest data from the Reserve Bank of India, driven by a consumption-led recovery and supportive regulatory measures. This was up from around 9% in May.

“Growth momentum has strengthened over the past few months and credit cycle has seen a meaningful pickup after GST cuts…with the full 100 bps CRR (cash reserve ratio) cut now in place and recent supportive regulatory measures, further support to credit expansion expected ahead," Motilal Oswal Financial Services said in a pre-earnings note.

Pre-quarterly updates from lenders suggest this momentum has sustained into the December quarter, even as deposit growth has lagged, at a little over 9% on year.

Macquarie Research flagged that the loan-to-deposit ratio (LDR) for the banking system has climbed to over 81%, the highest level on record. The widening gap between loan and deposit growth highlights a structural challenge for banks as they head into the earnings season.

“LDR ratios now are at all time high levels…If the current situation persists for a long time, banks have to hike deposit rates or perhaps banks have limited room to pass RBI rate cuts, something that one needs to be careful about," Macquarie Capital said in a report on 5 January.

On 3 January, Mint reported that the banking system’s incremental LDR ratio, which tracks fresh loans and deposits during the year, soared to 102% in 2025 from 79% a year earlier. An LDR ratio above 100% implies that banks are lending more money than the incremental deposits they are mobilizing.

The widening LDR ratio is forcing banks to lean increasingly on market borrowings, liquidation of excess statutory liquidity ratio (SLR) holdings, and balance-sheet buffers to raise money for lending.

This trend is particularly visible among large private lenders. HDFC Bank, which released its pre-quarter update, reported its LDR at 98.6% on a net advances basis, up from 98% in the previous quarter, highlighting the tightness in system liquidity.

Steady margins, improving asset quality

On the profitability side, net interest margins are expected to hold up in October-December, with the impact of recent 25 basis points rate cut likely to be felt more meaningfully from the March quarter.

“The 25 bps rate cut is likely to have a limited impact in 3Q as the repricing impact would only be partial. Additionally, the full transmission of CRR cuts should cushion margins. System liquidity infusion is also expected to enable smoother rate transmission without materially pressuring NIMs," Elara Capital said in a report on 26 December.

However, margins will continue to see pressure. “We see NIM for banks to be lower sequentially, clustering around a 5 bps ballpark decline," YES Securities said in a report on 2 January.

According to the brokerage, NIM outcomes in Q3 are expected to be divergent: Axis Bank, IndusInd Bank, Federal Bank, Indian Bank, and Bank of Baroda are likely to see a compression in margin, whereas HDFC Bank, IDFC First Bank, Kotak Mahindra Bank, State Bank of India, AU Small Finance Bank, RBL Bank, Bandhan Bank, and Equitas Small Finance Bank may report an expansion.

ICICI Bank, Punjab National Bank, Central Bank of India, Union Bank of India, and DCB Bank would likely report largely flat NIMs.

Yield on advances may decline, and the positive impact from prior term deposit rate reductions is expected to become evident this quarter onwards, Systematix Institutional Equities said in a report on 5 January. “The profitability is expected to improve YoY led by sustained sequential advances growth, higher fee income growth and lower credit costs."

Asset quality trends are also seen improving, particularly in unsecured retail and microfinance portfolios, helping contain credit costs.

“With improving growth trend in 2HFY26, especially in unsecured retail/MSME lending, we believe PVBs are likely to regain the lost ground, along with maintaining stronger margin profile amid diversified product portfolio, while superior underwriting keeps asset quality volatility under check," Ambit Institutional Equities said on 23 December.

The brokerage prefers regional banks due to their strong liability franchise, healthy asset quality, and focus on higher-yield secured segments.

The broader health of the banking system remains robust, with system stress at its lowest level in over a decade, non-performing loans near cyclical troughs, provision coverage ratios at record highs, and capital adequacy comfortably above regulatory requirements, Macquarie said.

Common equity tier-1 (CET-1) ratios of over 14.5% and liquidity coverage ratios exceeding 130% provide significant buffers against shocks.

Private sector banks are projected to post modest profit growth, while state-owned banks are likely to see stable but slower earnings expansion amid flatter margins, Motilal Oswal said.

Overall, earnings commentary on loan and deposit growth targets and guidance on NIM will be keenly watched this quarter.