MUMBAI: Rising government bond yields hit banks’ treasury income in the March quarter (Q4FY26), dragging down non-core earnings, especially at public sector lenders. Analysts now expect the pressure to intensify in the June quarter after an oil-driven spike in bond yields following the West Asia conflict.
If elevated oil prices persist through June, analysts warn the impact could spill beyond treasury income, with higher inflation and slower economic growth beginning to weigh on credit demand, margins and eventually asset quality.
The strain was already visible in March-quarter earnings. A Mint analysis of 36 listed banks that have reported earnings so far showed total income grew just 1% year-on-year, the slowest pace in four years, as a sharp fall in treasury income dragged other income down 11.6% to a near four-year low. Net profit growth, however, rose 12%, a five-quarter high.
Headline revenue growth at banks lagged the broader sample of 703 listed companies that have reported earnings so far, where total income rose 6%.
Treasury hit
Public sector banks bore the brunt of the hit. The 12 listed PSU lenders reported a 22% drop in other income, the steepest decline in 15 quarters. Their total income growth slipped 0.4%, while net profit rose 7%, the slowest in nine quarters.
PSU banks typically hold larger and longer-duration government bond portfolios than private peers, leaving them more exposed to mark-to-market losses when yields rise.
Private banks, by contrast, weathered the quarter better. About 24 private lenders reported nearly 18% profit growth, the strongest since Q1FY25, while other income still rose around 2%.
Other income accounted for nearly 13% of total income for PSU banks in Q4, down from around 14% in the previous quarter. For private banks, the share stood at about 15% and remained largely stable sequentially.
Analysts said private banks were relatively cushioned because their non-core income is more diversified, with stronger fee, product distribution, wealth management and retail banking streams. They also hold fewer long-duration government securities, limiting the impact of rising yields.
Bond market volatility had already picked up before the West Asia conflict began, as investors worried that heavy government borrowing and elevated global yields would keep domestic bond yields higher for longer, said experts.
The yield on the 10-year benchmark bond rose about 10 basis points (bps) between January and February. It has since spiked nearly 30 bps after the conflict erupted on 28 February, climbing to 7%—levels seen when the Reserve Bank of India (RBI) began its rate-cut cycle in February 2025—effectively wiping out the benefits of the central bank’s 125-basis-point easing cycle.
At the same time, expectations of sticky inflation and prolonged higher interest rates have kept long-term global yields elevated, particularly in the US.
“This has effectively reset the global term premium and created a hard floor for yields,” said Siddharth Chaudhary, head of fixed income at Bajaj Finserv Asset Management. “The pressure is visible at the long end of the (G-sec yield) curve, where concerns around heavy government borrowing have converged with higher global yields.”
Analysts now expect treasury losses to deepen in the June quarter, particularly for PSU banks.
Beyond treasuries
But treasury losses are not the only concern for investors tracking PSU lenders.
“The bigger question is whether public lenders can sustain aggressive low yield loan growth while steadily losing share in low cost CASA (current account and savings account) deposits,” said Santanu Chakrabarti, banking and financials analyst at BNP Paribas.
State Bank of India’s (SBI) March-quarter results underscored those pressures. Despite 17% year-on-year loan growth and exceptionally low credit costs, its net interest margin slipped below the key 3% mark to 2.93%, causing net interest income to miss estimates by 4.2%.
SBI’s low-cost current account and savings account (Casa) deposit growth stood at just 9%, while large private banks continued reporting low- to mid-teen growth, reflecting their stronger ability to attract low-cost retail deposits as rate cuts transmit into liabilities.
To be sure, SBI’s slower Casa growth comes off a much larger deposit base, meaning even lower percentage growth can translate into sizeable absolute deposit accretion.
However, private banks still retain an edge in attracting low-cost retail deposits because of their stronger primary banking relationships, better retail service networks, and deeper corporate linkages, said Manish Jain, head of fund management at Centrum.
"Large private banks are also trading well below their long-term average valuation multiples, while they continue to have a slight edge in deposit mobilisation and low-cost Casa franchise," Jain said. "Casa plus valuation both put together favour private sector banks at this juncture."
As a result, the market expects private banks to sustain stronger profitability going forward, as their superior deposit bases leave them better positioned even during a rate hike cycle, Chakrabarti of BNP Paribas said.
He added that PSU banks had earlier supported earnings by drawing down excess provisioning buffers built during the asset clean-up cycle.
“But that cushion is gradually shrinking. If elevated oil prices persist and economic growth slows, PSU banks, given their larger exposure to corporate and core sector lending, could face sharper pressure on margins and eventually asset quality than private peers,” he said.