MUMBAI: Indian banks are heading into the March quarter earnings season with geopolitical risks rising but little immediate damage to core performance.
Despite the prolonged West Asia war fuelling concerns around inflation, energy prices and rural cash flows, the impact on January-March (Q4FY26) earnings is expected to be limited. Loan growth has held up and asset quality remains stable, pointing to a steady quarter.
The earnings season will kick off on 18 April with major private sector lenders, including HDFC Bank, ICICI Bank, and Yes Bank, announcing their results.
Brokerage previews broadly agree the sector has weathered global volatility so far.
“The operating environment for Indian banks has weakened amid rising geopolitical tensions…However, we expect 4Q FY26 to reflect the limited impact of all these,” JM Financial Research said in a report on 6 April.
System data underscores that resilience. Loan growth stood at 13.7% year-on-year and deposits grew 10.8% in FY26 up to 15 March, according to data from the Reserve Bank of India (RBI). Credit demand has been supported by retail and corporate segments, though deposit mobilisation remains a constraint.
That gap continues to shape the outlook. Slower deposit growth has kept credit-deposit ratios elevated, forcing greater reliance on higher-cost funding—an overhang for margins.
Margins under strain
Net interest margins (NIM) are expected to remain mixed. Full transmission of the December 2025 rate cut of 25 basis points is likely to weigh on lending yields for larger banks, while mid-sized and small finance banks could see relative stability or some expansion.
“Margins may remain under pressure due to asymmetric rate transmission and elevated funding costs…overall, NIM trajectory remains downward-biased,” JM Financial said.
Kotak Institutional Equities also expects margins to be stable to marginally lower sequentially, reflecting the rate cut and deposit repricing, partly offset by a rise in wholesale deposits.
Treasury turns a drag
Treasury income is emerging as the second pressure point. A sharp rise in government bond yields during the quarter is expected to dent trading gains, particularly for public sector banks with larger statutory liquidity ratio (SLR) portfolios.
The yield on the 10-year benchmark government bond rose 35 basis points sequentially to 7% as of 31 March, likely weighing on treasury performance, Nomura Global Markets Research said in a report on 5 April.
Against this backdrop, earnings growth is expected to be modest. Kotak Institutional Equities estimates 2% year-on-year growth for the sector, driven by 1% revenue growth, with net interest income rising 6% and non-interest income declining 10%.
“We expect private banks to report 14% yoy earnings growth and PSU banks to report 11% yoy earnings decline,” the brokerage said.
Nomura echoed a similar view, noting that private sector banks trade at valuations that do not reflect structural advantages that public sector banks have had.
A combination of attractive valuations and durable earnings quality makes private banks a more compelling investment proposition at this point in the cycle, Nomura said, preferring Kotak Mahindra Bank, Axis Bank and ICICI Bank as its top picks.
Focus on commentary
Even as near-term performance holds steady, the focus is shifting to management commentary. Trends in cost of funds, liquidity, bond market rates and asset quality will be closely tracked amid volatile global conditions.
Asset quality remains broadly stable, with stress in unsecured retail and microfinance showing signs of moderation. Still, analysts flag emerging risks in segments such as MSMEs and commercial vehicles if external pressures persist.
“Our recent channel checks indicate that export-oriented MSMEs are facing uncertainty due to global demand conditions, and lenders are becoming incrementally cautious in extending credit to this segment,” Motilal Oswal Financial Services said in an earnings preview note.
Credit costs are expected to remain stable in the March quarter, though delinquency trends in MSMEs, commercial vehicles and affordable housing will be closely watched.
Despite these pressures, analysts believe the sector may have crossed its earnings trough.