Muted loan growth, margin woes may weigh on listed banks' Q1 profits

Profitability of listed commercial banks in India is expected to take a hit in the quarter ended June 30 (Q1FY26), with analysts estimating a 4.7 per cent year-on-year (Y-o-Y) decline in net profit. 

On a sequential basis, profit after tax may decline by 2.2 per cent, due to pressure on interest margins and muted credit growth.Estimates compiled from Bloomberg data for 18 listed banks show that net interest income (NII) — the difference between interest earned and interest expended — is likely to register only a modest growth of 2.2 per cent Y-o-Y in the quarter. 

Anil Gupta, cogroup head, financial sector ratings at Icra, said that tepid loan growth is weighing on NII, and in turn squeezing margins. 

“Banks have promptly passed on repo rate cuts to loans which are linked to external benchmarks, which constitute about 42 per cent of total loan book, impacting their interest income,” he said. 

While banks have also reduced rates on term deposits and savings accounts, the benefit will materialise with a lag due to the fixed nature of liabilities, Gupta said. 

According to Reserve Bank of India (RBI) data, the weighted average domestic term deposit rate rose slightly from 7 per cent in June 2024 to 7.07 per cent in May 2025. 

Meanwhile, the weighted average lending rate on outstanding rupee loans fell from 9.89 per cent to 9.67 per cent over the same period. Credit growth has sharply moderated — from 19.1 per cent Y-o-Y in June 2024 to just 9.6 per cent by mid-June 2025. 

Motilal Oswal expects further compression in lending yields across banks due to lower benchmark rates, while funding costs will adjust with a lag. “Even as most banks have reduced SA/TD rates, the moderation in funding costs is not immediate,” it noted.

Macquarie Equity Research projects a 10–15 basis point compression in net interest margins (NIMs). 

“The full impact of the February and April rate cuts should reflect in Q1FY26. In addition, system-wide loan and deposit growth on a quarter-on-quarter basis has remained flat. Y-o-Y, loan growth is below 10 per cent, while deposit growth is just above 10 per cent,” it said. 

In contrast to the previous quarter, when net profits were supported by non-operating incomes such as fees and treasury gains, analysts this time anticipate softer fee incomes. However, the decline in government securities (G-sec) yields may bolster non-interest income.“With a 35–50 basis point drop in G-sec yields on a sequential basis, trading gains are expected to be strong,” IIFL Securities said. 

In terms of asset quality, analysts expect fresh slippages to remain elevated in the first quarter for banks with higher exposure to unsecured retail and microfinance segments. Yes Securities forecasts a mixed trend in provisioning.