Banks' Q4FY26 performance may be stable amid global uncertainties

Stress may show up in MSME portfolio of banks going forward, brokerage say

Indian banks are expected to deliver a stable performance in the fourth quarter (January–March) of financial year 2025-26 (Q4FY26) as profitability is likely to be supported by healthy asset growth, stable asset quality, and range-bound net interest margins (NIMs), with some banks seeing marginal sequential expansion. 

According to Bloomberg data, the banking sector is likely to report around 5 per cent year-on-year (Y-o-Y) growth in net profit for the quarter, with private sector banks posting nearly 14 per cent growth, while state-owned banks are expected to report a decline. Sequentially, however, banks are likely to report a 2.3 per cent decline in net profit, with state-owned banks expected to post a drop of over 10 per cent, while private sector banks may record around 6 per cent growth. 

As of March 15, systemic credit growth stood at 13.8 per cent, remaining robust on the back of liquidity buffers and a consumption-led recovery following goods and services tax (GST) rate cuts. System-wide deposit growth stood at 10.8 per cent Y-o-Y, with faster credit growth pushing the credit-deposit (CD) ratio to 83 per cent. 

“With the Reserve Bank of India’s (RBI’s) support for the LCR-NSFR framework, we believe banks have room to further expand their CD ratios and fund credit growth, while deposit growth remains stable. We expect CD ratios across the banking system to increase, with public sector undertaking (PSU) banks likely to benefit more,” Motilal Oswal said in a report. It added that NIMs are expected to show divergent trends, with large private banks such as ICICI Bank and HDFC Bank likely to report flat margins, while Axis Bank and Kotak Mahindra Bank may see some decline. State-owned banks are expected to report broadly flat NIMs in Q4FY26. 

According to Yes Securities, NIMs are likely to be marginally higher sequentially, with around 5 basis points (bps) expansion. Barring IndusInd Bank, most banks under its coverage are expected to report modest sequential improvement in margins, driven by the continued repricing of term deposits, which should ease the overall cost of funds. The impact of repo rate cuts on loan yields has largely played out, while the impact of MCLR (marginal cost of funds-based lending rate) repricing is expected to be limited. 

While asset quality is expected to remain stable, brokerages are keeping a close watch on bank portfolios, particularly MSMEs (micro, small, and medium enterprises), given the potential impact of the ongoing West Asia conflict.  

“Asset quality remains stable across most segments. However, the ongoing war has introduced cash flow and input cost-related risks for MSMEs, which could lead to some stress in this segment,” Motilal Oswal said, adding that credit costs are expected to remain broadly stable, though trends in days past due (DPD) in MSME, commercial vehicle, and affordable housing segments are being monitored. 

“Fresh slippages in Q4FY26 are expected to remain broadly stable sequentially across most of our coverage universe, as easing stress in unsecured portfolios may be offset by a moderate rise in stress in other areas. Some incipient stress has been observed in export-oriented MSMEs, while the impact of the US-Israel vs Iran conflict remains a monitorable for potential spillovers beyond Q4,” Yes Securities said.

 

On treasury income, Yes Securities noted that due to accounting treatment of the available-for-sale (AFS) book, there will be no mark-to-market (MTM) gains or losses flowing through the profit and loss (P&L) account, with only realised gains or losses being recognised, while MTM changes are reflected in reserves.

 

Long-term bond yields have risen sequentially, with the 10-year yield averaging 6.69 per cent in Q4FY26, up 16 bps quarter-on-quarter.