Banks' good run on, but there are challenges despite profit growth

One more reasonably good earnings quarter for Indian banks, with the quality of loan assets remaining pristine.

 

Net profit of every bank may not be handsome – some have even posted a drop in net profits – but for the first time, the collective net profits of listed private and public-sector banks (PSBs) crossed the ₹1.5 trillion mark in the September quarter of 2025-26. At ₹1.51 trillion, it was up 4.4 per cent year-on-year (Y-o-Y). Quarter-on-quarter (q-o-q) – in the September quarter over the June quarter – the net profits of this set of universal banks was up 3.98 per cent.

 

Barring two PSBs, the banks that reported a drop in net profits Y-o-Y – and even Q-o-Q in some cases – are all from the private sector. The quantum of drop in net profits varies, and so do the reasons behind it – from higher provisioning for taking care of pockets of stress to slower growth or drop in income, both interest income and the so-called other income, including fees and treasury profits. IndusInd Bank Ltd was the only entity which posted a loss in this quarter. 

 

State Bank of India (SBI) topped the list with a ₹20,160 crore net profit, followed by HDFC Bank Ltd (₹18,641 crore), ICICI Bank Ltd (₹12,359 crore) and Axis Bank Ltd (₹5,090 crore). These banks formed the ₹5,000 crore-plus net profit earning quartet in the September quarter. Four banks among the PSBs – Punjab National Bank, Bank of Baroda, Canara Bank and Union Bank of India – recorded net profits of over ₹4,000 crore. And two – one PSB (Indian Bank) and a private bank (Kotak Mahindra Bank Ltd) formed the ₹3,000 crore-plus net profit club. All figures are rounded off.

 

While the net profits rose, the operating profits dropped – both Y-o-Y and Q-o-Q – for the industry. Private banks as a group, however, posted marginal rise in operating profits in the September quarter over the year-ago quarter, but their operating profits also dropped over the June quarter. The PSBs as a group witnessed a drop in operating profits, both Y-o-Y and Q-o-Q.

 

Why did their operating profits drop and, despite that, how did the net profits rise?

 

Well, there’s only a marginal rise in the net interest income (NII) for the industry. Besides, other income, too, has not swelled. That’s why the operating profit has dropped. Despite tepid growth in income, net profits of most banks rose because of lower provisioning.

 

NII rose around 2.5 per cent Y-o-Y, and 1.5 per cent Q-o-Q. Quite a few banks, both PSBs and private banks, recorded a drop in NII. Among the large banks, ICICI Bank posted a 7.39 per cent rise in NII. The NII growth rate for SBI, HDFC Bank and Axis Bank was less than 5 per cent.

 

When it comes to other income, the industry recorded 4.7 per cent Y-o-Y rise but witnessed around 13.5 per cent Q-o-Q drop. SBI’s other income remained at the same level as in the September quarter of last year, while seven of the 12 PSBs posted a drop. In the pack of private banks, HDFC Bank’s other income rose close to 25 per cent.

 

Overall, the Y-o-Y provision rose by just 1.47 per cent; Q-o-Q, it dropped 31 per cent. SBI had the highest provisioning at ₹5,400 crore, followed by Axis Bank (₹3,547 crore), HDFC Bank (₹3,501 crore), IndusInd Bank (₹2,622 crore) and Canara Bank (₹2,354 crore).

 

The industry could afford to have modest provisioning as there has been no rise in the pile of bad assets. The gross non-performing assets (NPAs) of the industry dropped below ₹4 trillion (at ₹3.99 trillion), down over 11 per cent from the year-ago quarter (₹4.49 trillion). In the June quarter, gross NPAs were ₹4.17 trillion. The net NPAs dropped 9.9 per cent Y-o-Y to ₹87,384 crore.

 

Seven and a half years ago, in March 2018, the gross NPAs of all scheduled commercial banks had peaked at around ₹10.36 trillion. At the time, after provisioning, the net NPAs of the industry were around ₹5.2 trillion.

 

Barring Bank of Maharashtra, all PSBs recorded a Y-o-Y drop in gross NPAs in the September quarter in absolute terms. When it comes to net NPAs, Bank of Baroda gave company to Bank of Maharashtra. The private banks presented a mixed picture with a few seeing a rise in both gross and net NPAs.

 

In percentage terms, most banks brought both gross and net NPAs down in the September quarter. All 12 PSBs recorded less than 1 per cent net NPAs. Among private banks, just four recorded more than 1 per cent net NPAs, the highest being 1.37 per cent. Overall, 27 of the 31 listed universal banks had less than 1 per cent net NPAs; for 16 of them, it was less than half a per cent.

 

Large banks like SBI, HDFC Bank, ICICI Bank and Axis Bank, among others, belonged to this group. Among PSBs, Indian Bank had the lowest net NPAs of 0.16 per cent; IDBI Bank Ltd’s 0.21 per cent was the lowest among private banks.

 

As for gross NPAs, Bandhan Bank Ltd topped the list with 5.02 per cent. Three PSBs (Punjab National Bank, Union Bank of India, Central Bank of India) and an equal number of private banks (IndusInd Bank, Dhanlaxmi Bank Ltd and Jammu & Kashmir Bank Ltd) had more than 3 per cent gross NPAs. SBI, HDFC Bank, ICICI Bank and Axis Bank were a few others with less than 2 per cent gross NPAs. 

 

It's not the quality of assets. At the moment, the bigger challenge before the banking industry is on the liabilities side. The kitty of low-cost current and savings accounts (Casa) of the industry has been shrinking every quarter and, following this, the net interest margin (NIM), loosely the difference between a bank’s cost of deposits and earnings on loans, is thinning. This is leading to low NII.

 

Barring a few exceptions, most banks recorded a dip in Casa in the September quarter and their NIM was also under pressure. Yes Bank, Bank of Maharashtra and IDFC First Bank Ltd are exceptions. They raised their Casa ratio in the September quarter – both above 50 per cent.

 

Three PSBs (Indian Overseas Bank, Central Bank of India and Bank of Maharashtra) and five private banks (IDBI Bank, Kotak Mahindra Bank Ltd, ICICI Bank and Jammu & Kashmir Bank, IDFC First Bank) had over 40 per cent Casa. SBI’s Casa dropped from 40.03 per cent to 39.63 per cent Y-o-Y and HDFC Bank’s from 35.3 per cent to 33.9 per cent. On a Q-o-Q basis, HDFC Bank managed to hold on to the same Casa percentage, while SBI improved it by a shade.

 

As regards NIM, a few banks managed to raise it marginally while others saw a drop. Bandhan Bank enjoyed the highest NIM in the industry at 5.8 per cent, followed by IDFC First Bank at 5.59 per cent. For both, however, NIM dropped. These two apart, only three banks — all from the private sector— recorded more than 4 per cent NIM in the September quarter. These were ICICI Bank, Kotak Mahindra Bank and RBL Bank. Finally, as a group, the PSBs showed better growth both in advances and deposits compared with their private peers. Will they be able to keep the momentum going and grow their market share, which they have been losing? Everyone will be keenly watching it, even as the finance ministry is talking about consolidation and making the PSBs bigger to meet the growing needs of a fast-expanding economy. 

 

The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking.

 

To read his previous columns, log on to www.bankerstrust.in 

 

X: @TamalBandyo