Indian banks are heading into the first quarter earnings season of the current financial year with multiple headwinds on the horizon. Analysts across major brokerages expect a subdued performance from both public and private sector lenders, driven by slower credit expansion, pressure on net interest margins, and lackluster deposit growth.
Credit growth, a key engine of bank profitability, has decelerated significantly. As of mid June, industry wide credit expansion stood at just under ten percent. This marked a noticeable cooling compared to previous quarters, largely due to a more cautious stance by banks toward unsecured lending. Some individual lenders like IDFC First Bank, Karur Vysya Bank, DCB Bank, City Union Bank, and Kotak Mahindra Bank are expected to buck the trend with relatively healthier credit growth, but the overall picture remains muted.
The squeeze on net interest margins, or the difference between what banks earn from loans and what they pay on deposits, adds another layer of concern. The Reserve Bank of India’s recent policy rate cuts have not yet fully translated into deposit repricing, resulting in pressure on margins for most lenders. Although a gradual reduction in deposit rates and a recent cut in the cash reserve ratio are expected to ease funding costs in the months ahead, these benefits are unlikely to fully materialize in the April to June quarter.
ICICI Securities has indicated that net interest income, especially for private banks under its coverage, may see only modest year on year growth of about four percent. This suggests that revenue growth from core lending operations could remain soft across the board. Meanwhile, public sector banks are expected to report even lower profit growth, with earnings likely to moderate sharply due to higher provisions and normalized operating expenses.
The deposit side of the equation is not providing much relief either. Banks continue to face challenges in attracting fresh deposits. Seasonal patterns that typically reverse the strong inflows of the March quarter are playing out again this year. As a result, deposit growth is expected to remain weak, further adding to the strain on liquidity and limiting the banks’ capacity to lend.
However, not all is bleak. Treasury gains may provide some support to bank earnings this quarter. As yields on government securities have declined, banks are likely to record valuation gains on their investment books. This could help cushion some of the pressure on interest margins and profitability.
Asset quality remains a mixed picture. On one hand, stress in the microfinance sector persists but is reportedly easing. On the other, slippages especially from agricultural lending are expected to see a seasonal uptick, particularly in large private banks such as Axis Bank and HDFC Bank, as well as select public sector lenders. Unlike the previous quarter which benefited from one time large recoveries, the current period is expected to see only granular resolutions and more moderate improvement in asset quality.
Overall, the April to June period is shaping up to be a testing time for Indian banks. While some relief may come from lower deposit costs and treasury income, the combined impact of weak loan demand, squeezed margins, and cautious provisioning may weigh heavily on reported earnings. As the sector prepares to post results, the numbers will be closely watched for signs of a turnaround or continued stress.
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