The third quarter is shaping up to be a challenging one for Indian banks, with analysts forecasting muted profitability across the sector. A mix of slower credit growth, contracting margins, and elevated operational costs is expected to weigh heavily on earnings for both private and public sector banks.
For private sector banks (PVBs), profitability is anticipated to remain subdued. Emkay Global attributes this to a noticeable deceleration in credit growth, which directly impacts interest income. Adding to the strain are shrinking net interest margins (NIMs), driven by rising funding costs, and escalating operational expenses. Furthermore, increased provisioning for loan losses is expected to take a toll on the bottom line, leaving private banks grappling with profitability pressures.
Public sector banks (PSBs) are not immune to the headwinds. Analysts predict a sequential moderation in earnings for these institutions as well. Lower treasury gains, a result of the recent resurgence in government securities (G-Sec) yields, have dented their profitability. In addition, the pace of non-performing asset (NPA) recoveries has slowed, while margins continue to soften. However, analysts point out that some relief has come from lower operating expenses and well-contained credit costs, supported by stable corporate asset quality.
A significant concern across the sector is the pressure on net interest margins. Elara Capital highlights three primary factors contributing to this challenge: the continued repricing of deposit books, although its impact is diminishing; persistently high incremental deposit costs; and increased interest income reversals due to higher slippages. Penal interest levied in certain cases has also added to the mounting cost pressures.
The impact of rising deposit rates, which have been on the uptick in recent months, is particularly notable. Banks such as Axis Bank, IndusInd Bank, and Canara Bank raised rates in the one-to-three-year bucket during December, and the effects of these hikes are likely to be felt in the months ahead. The persistent climb in deposit rates reflects ongoing difficulties in deposit mobilisation, with funding cost challenges expected to persist in the near term.
Despite the Reserve Bank of India’s (RBI) 50 basis point reduction in the cash reserve ratio (CRR) to ease systemic liquidity, banks have largely refrained from cutting deposit rates. This reluctance stems from a need to maintain deposit momentum in a tight liquidity environment, further reinforcing funding cost pressures. Emkay Global forecasts that these factors could result in a 5 to 25 basis point contraction in NIMs during the third quarter.
Net interest income (NII) growth is also expected to slow. For PSBs, the absence of treasury gains and ongoing cost pressures will likely weigh on earnings. Meanwhile, private banks face the dual burden of slower credit advances and elevated costs, further squeezing profitability.
While corporate asset quality remains under control, the combined impact of margin compression, higher funding costs, and slower recovery trends is expected to keep profitability under pressure. This quarter will be pivotal in determining how banks navigate these headwinds while laying the groundwork for a stronger financial trajectory in the coming year.