Banks may report lower single-digit profit growth, margin compression in Q3

Banks' Q3 profits seen rising 2.4%, led by private lenders, as repo rate cut creates mixed NIM trends and deposit growth remains a challenge

Commercial banks are expected to register 2.4 per cent year-on-year (Y-o-Y) growth in net profit for the third quarter (October–December/Q3) of 2025–26 (FY26). Public-sector banks (PSBs) are likely to report a marginal decline, while private-sector banks are expected to post 5.5 per cent growth, according to Bloomberg consensus estimates. On a sequential basis, banking sector profit is seen growing by 2 per cent. 

Net interest margins (NIMs) may show a mixed trend during the quarter, as some banks could face margin compression following the 25 basis-point (bp) policy repo rate cut by the Reserve Bank of India in December. More than 40 per cent of loans at most banks are linked to external benchmarks such as the policy repo rate, which is revised immediately, while deposit repricing takes place with a lag. 

Domestic brokerage Motilal Oswal Financial Services (MOFSL) said the 25-bp rate cut is likely to have a limited impact in the reporting quarter, as the repricing effect would only be partial. Full transmission of the reduction in cash reserve ratio requirements should cushion margins, while the liquidity infusion is also expected to speed up rate transmission. 

“NIM outcomes in Q3 are expected to be divergent, as Axis Bank, Indian Bank, and Bank of Baroda are likely to report a decline, whereas HDFC Bank, IDFC First Bank, State Bank of India, RBL Bank, and Bandhan Bank may report expansion. ICICI Bank and Punjab National Bank (PNB) are expected to report largely flat NIMs,” said Nitin Aggarwal, research analyst at MOFSL. 

A few banks, such as Canara Bank and PNB, are expected to report higher non-interest income due to gains from stake sales in subsidiaries, according to a report by Kotak Institutional Equities (KIE). Fee income may see a sequential pickup, led by better disbursement-linked processing fees during the festival period. 

Treasury gains are likely to be limited, as government bond yields hardened during the quarter. 

Q3 is expected to witness an uptick in credit growth, even as deposit mobilisation continues to pose a challenge for Indian banks. Latest provisional updates from banks indicate loan growth of around 12 per cent Y-o-Y in Q3FY26, analysts said. 

“Advance growth at frontline banks is slower than in recent quarters. Frontline private banks have reported growth of 9–11 per cent Y-o-Y, while most PSBs have posted loan growth of less than 10 per cent Y-o-Y,” the KIE report said. 

Banks are expected to continue facing challenges in mobilising low-cost deposits, as competition remains intense. However, ongoing term deposit repricing should lead to moderation in the cost of funds during Q3 and the fourth quarter (January–March/Q4), partially offsetting the impact of the recent 25-bp repo rate cut. 

Deposit growth is expected to remain steady at 10 per cent Y-o-Y in FY26. 

Overall asset quality for the sector is expected to remain steady, though slippages in the agriculture sector may see an uptick, Elara Capital said in a report. 

“Q3 will likely be characterised by steady recovery trends, which should help cushion credit cost pressures. Another segment to watch is sub-₹10 lakh ticket-size loans, including microloans against property,” the report said, adding that the quarter may see improvement in asset quality in the personal loan and microfinance segments.