Indian banks' net interest margins likely to improve in H2 FY26: S&P

S&P Global expects Indian banks' margins to recover in H2 FY26 after RBI's 100 bps rate cut hit Q1 earnings, with SBI, ICICI posting profit growth and asset quality seen healthy

Net interest margins (NIMs) of banks are expected to improve from the second half of the current financial year (H2FY26), according to an analysis by S&P Global Market Intelligence.

 

The improvement in margins will come after a sharp reduction in banks’ NIMs due to the 100 basis points (bps) cut in the policy rate by the Reserve Bank of India (RBI). 

 

State-run Bank of Baroda and Punjab National Bank (PNB), as well as their private sector peers, HDFC Bank and Axis Bank, reported a fall in net income during the April-June quarter (Q1FY26), according to S&P Global Market Intelligence data.

 

“Four of the top six Indian banks reported a decline in net income in the first quarter ended June 30, partly due to a 100 basis point reduction in benchmark interest rates by the RBI. State Bank of India (SBI) reported a net profit of ₹212.01 billion for the Q1FY26, up 9.7 per cent year-on-year (Y-o-Y). Private sector lender ICICI Bank logged a 15.9 per cent Y-o-Y increase in net profit to ₹135.58 billion,” the analysis said. 

 

SBI, India’s largest lender, maintained its NIM guidance of about 3 per cent in FY26 after reporting an NIM of 2.77 per cent in Q1FY26, compared with 2.99 per cent a year ago. Meanwhile, the NIM of HDFC Bank, India’s largest private sector lender, saw its margin slip to 3.49 per cent from 4.06 per cent. PNB reported an NIM of 2.43 per cent.

 

On the asset quality front, some banks reported a slight deterioration in asset quality and increased provisioning, according to the report. 

 

S&P Global Ratings upgraded ratings of 10 Indian banks and said it expects India’s sound economic fundamentals to drive growth over the next three years. The ratings agency said that Indian banks are expected to maintain adequate asset quality, good profitability, and enhanced capitalisation over the next 12-24 months, despite some pockets of stress.