Results preview: Bank profits to see sharp dent in Q2 on margin pressure

Commercial banks are heading for one of the worst quarters in recent times as the net profit of listed commercial banks is likely to shrink by 18.7 per cent year-on-year (Y-o-Y) in the second quarter of 2025-26 (Q2FY26) due to continued pressure on interest margins and subdued credit growth, according to analysts’ estimates compiled by Bloomberg. Sequentially, profit after tax (PAT) may contract by 9.8 per cent over Q1FY26.

 

Anil Gupta, co-group head, financial sector ratings, Icra, said the volume growth in credit was not offsetting the pressure on net interest margin (NIM) in the second quarter, denting the bottom line. However, net interest income (NII) is expected to grow sequentially in tandem with improvement in credit offtake, and bottoming out of margin from the third quarter.

 

If the margin pressure was not enough, the rise in bond yields especially after the monetary policy review in August may limit the extent of contribution from the treasury gains to bottom line in Q2FY26. Credit costs may also weigh on margins, given the stress in the unsecured loan book, bankers said.

 

In its review note, Domestic brokerage Motilal Oswal Financial Services said the margin pressure would continue, and treasury gains are expected to moderate in Q2FY26. NIM is expected to bottom out in Q2FY26, and then improve in the second half of 2025-26 (H2FY26).

 

The analysts’ estimates for 19 listed banks sourced from Bloomberg data showed that NII, revenues from interest minus interest expenses, may shrink by 2.1 per cent Y-o-Y. Also, sequentially, NII may show a decline of 4.2 per cent over Q1FY26.

 

The growth in NII was weak in Q1FY26 also. The NII had grown by just 1.8 per cent Y-o-Y and NIM was down by 25 basis points (bps) Y-o-Y to 2.89 per cent, according to rating agency CareEdge.

 

According to Reserve Bank of India (RBI) data, the weighted average lending rates on outstanding rupee loans declined to 9.32 per cent in August 2025 from 9.44 per cent in June 2025. It was 9.88 per cent in September 2024. The decline was driven by rate cuts, weaker credit demand, and competitive pressures, CareEdge said.

 

The weighted average rates on outstanding domestic term deposits declined to 6.87 per cent in August 2025 from 7 per cent in June 2025. It was 7.04 per cent in September 2024. The operating spread between weighted average rate on outstanding advances and deposits was 2.45 per cent in August 2025.

 

The pace of bank credit expansion has moderated at 10.4 per cent Y-o-Y as of September 10, 2025, from 13 per cent a year ago. Also, the deposit growth has slowed down, RBI data showed.