Margin squeeze takes a toll on banks' profit in Q2FY26, shows data

Hardening yields limit contribution from Treasury gains

With interest margins under pressure, banks posted 4.2 per cent year-on-year (Y-o-Y) growth in net profit at ₹96,506 crore for the second quarter of 2025-26 (Q2FY26). Sequentially, profit rose 5.21 per cent over ₹91,727 crore in Q1FY26, according to the data compiled by BS Research Bureau for listed 30 commercial banks.  

These include HDFC Bank, Axis Bank, ICICI Bank, State Bank of India, Bank of Baroda and Punjab National Bank. The hardening of yields put a limit on support from treasury income, a part of non-interest income, to the bottomline, bankers said. 

Interest rate repricing dampens NII & margins 

The net interest income (NII) grew by just 2.46 per cent Y-o-Y basis to ₹2.1 trillion and 1.47 per cent sequentially over ₹2.07 trillion in Q1FY26. 

Bankers said that lenders have reduced interest rates responding to Reserve Bank of India’s 100 basis point cut in the policy repo rate. However, the pace of transmission has been faster on loans (62 basis points) than repricing of deposits (22 bps) in 12 months ended September 2025. The moderation in non-food loan growth to 10.2 per cent in September 2025 from 13 per cent a year ago also impacted the revenue from loan disbursements. 

RBI data showed the weighted average lending rate (WALR) on outstanding rupee loans of banks declined by 62 bps to 9.26 per cent in September 2025 from 9.88 per cent year ago. The weighted average interest rate on outstanding domestic rupee term deposits was down by 22 bps to 6.82 per cent in September 2025 from 7.04 per cent in September 2024.  

CareEdge Ratings in its review said that net interest margins (NIMs) declined by 21 basis points Y-o-Y in Q2FY26, as the pass-through of interest rate benefits to depositors was outpaced by the repricing of loan yields. 

Private banks and public sector banks reported declines of 17 bps and 27 bps Y-o-Y, respectively. 

Domestic brokerage Motilal Oswal Financial Services in its Q2 review said that margins across most banks were ahead of expectations, aided by a faster decline in the cost of funds. Many banks guided for further NIM improvement in the second half of FY26 (H2FY26), driven by the cash reserve ratio (CRR) cut and accelerating growth momentum. 

Limited gains on treasury impacts non-interest income 

The non-interest income, comprising fees, commissions, treasury earnings, and recoveries, grew by 9.42 per cent Y-o-Y to ₹92,752 crore in Q2FY26. However, it declined sequentially by 9.17 per cent over ₹1.02 trillion in Q1FY26. 

The anticipated moderation in treasury gains materialised, as bond yields hardened, limiting mark-to-market income, CareEdge said. 

Asset quality stays robust 

The asset quality of commercial banks remained robust with decline in bad loans. The gross non-performing assets (NPAs) declined to ₹3.86 trillion in September 2025 from ₹4.48 trillion a year ago and ₹4.16 trillion in June 2025, according to Capitaline data. 

Reflecting better asset quality profile, the provisions and contingencies by just 1.3 per cent Y-o-Y to ₹29,919 crore in September 2025. However, they shrank 31.1 per cent sequentially over ₹43,408 crore in Q1FY26. 

Motilal Oswal Financial Services said that the asset quality improved, with private banks witnessing easing stress in the unsecured segment, though a few remain cautious on retail Commercial Vehicle Lending. Lenders expect growth in unsecured loans to revive as stress moderates and macro conditions strengthen.