Bond windfall cushions NII strain for PSBs as margins shrink on rate cuts

Public sector banks saw Q1 FY26 profit rise 10.6% YoY on treasury gains and lower provisions, while NII was flat as lenders passed on policy rate cuts to customers

Public-sector banks (PSBs) posted  10.6 per cent year-on-year (Y-o-Y) growth in net profit in the April–June quarter (Q1) of 2025-26 (FY26) on the back of a hefty rise in other income, covering elements like treasury gains, fees, commissions, and recoveries. The decrease in provisions for bad loans also supported the bottom line amid an erosion in net interest income (NII) and margins. 

Net profit stood at ₹44,218 crore in Q1FY26, up from ₹39,974 crore a year ago. Sequentially, however, net profit shrank by 8.6 per cent from ₹48,370 crore in the fourth quarter (Q4) of 2024-25 (FY25), according to data compiled by the BS Research Bureau for 12 listed state-owned banks. NII — a key source of earnings for state-owned lenders — was flat, up just 0.2 per cent Y-o-Y, at ₹1.06 trillion in Q1FY26. Sequentially, it shrank by 3.2 per cent from ₹1.09 trillion in Q4FY25. NII came under pressure as banks passed on policy rate cuts to customers, especially for external benchmark-linked loans in the retail segment, bankers said. 

Reserve Bank of India data showed the weighted average len­ding rate on outstanding rupee loans of PSBs declined from 9.21 per cent in June 2024 to 9.09 per cent in March 2025 and further to 8.76 per cent in June 2025. The weighted average term deposit rate rose from 7 per cent in June 2024 to 7.16 per cent in March 2025 but fell to 7.05 per cent in June 2025. 

Falling yields boost treasury gains 

PSBs reported a 42.4 per cent Y-o-Y growth in other income to ₹48,996 crore. However, it fell sequentially by 15.8 per cent from ₹58,186 crore in Q4FY25. Non-interest income benefited from favourable treasury gains and recoveries from written-off accounts.  PSBs witnessed no­table mark-to-market gains, ben­efiting from their relatively higher exposure to long-duration government securities amid eas­ing bond yields, CareEdge Ratings said in a note on results review. 

Bankers said that while banks gained from treasury-side income in Q1, the April–June period, being a slow quarter for credit growth, saw subdued earnings from fees and commissions. The yield on 10-year Government of India bonds, as of June 2025, fell by 33 basis points quarter-on-quarter to 6.33 per cent from 6.66 per cent. This decline in bond yields during the current quarter, due to rate cuts, has driven up bond prices, resulting in higher treasury income, CareEdge said. 

Provision bills low on robust asset quality 

With asset quality remaining robust, provisions and contingencies — predominantly money set aside for stressed assets — declined by 6.4 per cent Y-o-Y to ₹15,918 crore. They were also down sequentially by 10.5 per cent from ₹17,789 crore in Q4FY25. Gross non-performing assets (NPAs) declined from ₹3.28 trillion in June 2024 to ₹2.77 trillion in June 2025. Sequentially, they also declined from ₹2.83 trillion in March 2025. 

While overall bad loans dec­lined, sectors like agriculture sho­wed a seasonal rise. Some segments of retail and micro, small, and me­dium enterprises also sho­wed signs of stress, a senior public-sector banker said. Banks have maintained a high provision cover for bad loans, which has helped reduce net NPAs to ₹54,262 crore in June 2025 from ₹68,212 crore in June 2024. The decline was marginal from ₹55,716 crore in March 2025.