Market research firms like JM Financial and InCred Equities forecast a weak quarter for the banking sector in the Q1 earnings season. The banking sector is expected to see a decline in both profits and margins. Additionally, the loan growth for the banks is also going to be on the weaker side in the quarter.
Weak loan growth
The credit growth for the banking sector stood at 9.6 percent by June 13, says a JM Financial report. The industrial credit growth remains significantly lower than that of the previous years’ growth trends. In May, industrial credit growth was at 4.8 percent YoY. For comparison, in May last year, the industrial loan book saw an 8.9 percent YoY growth.
InCred Equities says that the moderation in industrial/ corporate credit is due to the private sector banks choosing to protect their margins over the credit growth. As a result, the private segment banks’ loan books are driven by the retail and SME segments in the quarter.
In Q1FY26, the banking sector’s loan book is expected to grow at 10.8 percent on a YoY basis. In the last quarter, Q4FY25, the credit growth was 12.6 percent YoY.
Margin pressure
The interest rate cuts by the Reserve Bank of India in April and June are going to impact the margins of the banks in Q1. Due to this, the banks are expected to see just a 2 per cent YoY growth in Net Interest Income (interest earned by banks on loans – Interest paid by banks on deposits).
JM Financial says that the banking sector’s Net Interest Margins (NIM) are expected to squeeze by 10 to 20 basis points in Q1FY26 against Q1FY25. Furthermore, the NIM are expected to be under pressure in Q2FY26 as well and will start easing in H2FY26 as the rate cut effect begins on term deposits as well.
Assets quality
InCred Equities expects a reduced stress in the unsecured segment, like personal loans of credit cards, for the large banks. However, according to JM Financial, credit cost in the unsecured segment is going to remain high in Q1.
Furthermore, JM Financial says that the large private banks like ICICI Bank and Axis Bank are in a much better position than the smaller banks like IndusInd Bank and Bandhan to face credit cost challenges due to better buffers in their balance sheets.
