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Headwinds persist; earnings to recover in 2HFY26

Margin pressure to continue; treasury gains expected to moderate

* Credit growth modest; estimate 11% YoY growth for FY26E: As of 5th Sep’25, systemic credit growth stood at ~10.3% YoY, reflecting demand softness in key retail and corporate segments. Incremental CD ratio stood at ~83% (vs. outstanding CD ratio of ~79%). Pickup in consumption activity, led by GST rate cuts and income tax relief, alongside lower borrowing costs, will drive a gradual recovery in loan demand in 2HFY26. We, thus, estimate growth trends to remain modest over 2QFY26 for our coverage banks, while we estimate full-year system credit growth to sustain at 11% YoY and improve to ~12.5% in FY27E.

* Deposit growth broadly stable at 9.8%, despite cuts in deposit rates: System deposit growth was stable at 9.8% YoY in Sep’25, despite the rate cuts. Banks continue to face challenges in mobilizing low-cost CASA deposits, and we expect the same trend to continue in the near term. With recent moderation in policy rates, both SA and TD rates are reduced by banks, which should ease CoF for banks over 2HFY26, thus supporting NIM recovery. We expect deposit growth to remain intact at ~10% YoY in FY26E.

* Sector NIMs to bottom out in 2Q; expect improvement in 2HFY26: The impact of the big 50bp rate cut in Jun’25 on banks’ lending yields will be fully reflected in 2Q, while the moderation in CoF will happen with a lag. Thus, NIMs are estimated to contract for most banks in our coverage. We estimate sharper NIM declines for Bandhan Bank, EQUITAS, AUBANK and AXSB, while RBL being the outlier with NIMs expected to improve slightly. However, deposit repricing is underway, and the phased CRR cut is further expected to support margin recovery in the coming quarters.

* Asset quality: Unsecured retail (MFI & CC) stress persists, though recovery not far: We expect unsecured delinquencies to stay elevated even as most lenders hinted at an improving trend in monthly collection efficiencies in MFI. Select segments like micro-LAP, CV and affordable housing have seen stress in select pockets, and we remain watchful on banks’ commentary on the overall asset quality outlook. Moreover, with select northern and eastern states witnessing floods, there could be a marginal rise in stress in MFI, micro-LAP and MSME segments. We expect private/PSU banks to report controlled credit cost, while mid-size banks with higher exposure to unsecured/MFI segments are expected to report high provisioning.

* Estimate 17.7% PAT CAGR over FY26-28E: For 2QFY26, we estimate NII for our banking coverage universe to decline 0.9% YoY/1.8% QoQ, while PPoP is also expected to decline 5.5% YoY/14% QoQ). We estimate private banks’ PAT to decline 7.3% YoY/6.7% QoQ and PSU banks’ PAT to fall 7.1% YoY/1.9% QoQ. For our coverage universe, we estimate PAT to decline 7.2% YoY/4.5% QoQ. With earnings gaining traction from 2HFY26, we estimate 17.7% earnings CAGR over FY26-28E.

Private Banks: 2Q earnings to decline 7.3% YoY (3.8% YoY growth in FY26E)

* For the private banks under our coverage, we estimate PPoP to decline 2% YoY/ 18% QoQ and PAT to decline 7.3% YoY/6.7% QoQ in 2QFY26. We estimate ~19.8% earnings CAGR over FY26-28E for private banks.

* Estimate NII to grow 0.6% YoY/fall 2% QoQ in 2QFY26. Among large private banks under our coverage, NII growth is estimated at 2.3% YoY (-2% QoQ) for HDFCB and 5.5% YoY (-2.3% QoQ) for ICICIBC, whereas NII is expected to decline by 2.3% YoY/2.9% QoQ for AXISB, 4.2% YoY/0.8% QoQ for KMB, and 2.3% YoY/1% QoQ for Federal.

* Unsecured retail stress shows early signs of easing, but challenges persist in cyclical sectors like CV loans and MSMEs, with credit costs expected to normalize in 2HFY26. Large private banks with more diversified and secured portfolios continue to fare better.

PSU Banks: 2Q PAT to decline 7% YoY (1.0% YoY growth in FY26E)

We estimate PSU banks’ PAT to decline 7.1% YoY (down 1.9% QoQ) in 2QFY26E, owing to a decline in NIMs and moderation in treasury gains for most PSBs, barring PNB.

* NII is likely to decline 2.5% YoY (down 1.7% QoQ). Opex is likely to be under control, though treasury gains are expected to moderate as bond yields remain range-bound with some recent up-moves. The upcoming CRR cut and ongoing deposit repricing should aid medium-term margins.

* Asset quality outlook stable: We expect stable asset quality trends for PSU banks, aided by controlled slippages and robust PCR.

* We estimate PSU banks to report earnings CAGR of 15.2% over FY26-28E.

Small Finance Banks: NIMs to decline further; credit cost to ease in 2H

* AUBANK’s 2Q PAT is likely to decline by 14.8% QoQ (down 13.4% YoY) to INR4.9b, due to a decline in margins/other income and elevated credit costs. NII is expected to decline by 1% QoQ (up 2.5% YoY), while NIMs are estimated to decline ~20bp QoQ. The new MFIN guardrails implemented in FY26 are expected to keep growth measured while aiding gradual improvement in asset quality. We expect credit costs to stay high through 1HFY26 before moderating in 2H, as elevated stress in the MFI segment could persist until 3Q.

* EQUITASB is estimated to report PAT at INR309m in 2QFY26 after posting a significant loss in 1QFY26. Margins are expected to decline 25bp QoQ to 6.30%. Loan growth is likely to gain traction to 7.3% YoY/4.9% QoQ.

Payments/Fintech: SBI Cards – Margins to expand at calibrated pace; Paytm – Healthy GMV and margin to drive 2Q profit

* SBICARDS: Provisioning stays elevated, reflecting persistent asset quality concerns. Loan book is expected to grow ~8.1% YoY in 2Q, though we expect card sourcing/volumes to improve over the medium term. We estimate NIMs to expand at a calibrated pace as festive spending drives healthy growth in the balance sheet. We estimate PAT to grow at 49.5% YoY/8.8% QoQ to INR6b.

* PAYTM: Revenue from operations is likely to grow ~5% QoQ (up 21% YoY) to INR20b, while contribution profit is expected to grow 32% YoY to INR11.8b. Contribution margin is expected at 58.7%. We expect a profit of INR1.34b in 2QE.

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