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* Banks (incl. SFBs) credit growth was largely in line with our estimates, delivering an 11/4% YoY/QoQ growth in Q2FY26, thereby broadly replicating systemic growth. The PSU banks (+12/4% YoY/QoQ) under our coverage credit growth outpaced private banks, including SFBs (+11/3% YoY/QoQ), during the quarter. Credit growth was mainly driven by the Retail (largely Home Loans, LAP) and secured SME segments, while corporate loans showed early signs of revival. However, many banks indicated continued pricing pressure in the better-rated corporates, keeping growth muted in that segment. The outlook in the unsecured segments has turned optimistic, with many lenders indicating resumption of growth in H2.

* Deposit growth during the quarter lagged credit growth, driving LDR higher. Our coverage banks delivered a deposit growth of 11/3% YoY/QoQ in Q2 largely driven by healthy growth in CASA Deposits, thereby driving CASA Deposit improvement across many banks. The LDR for our coverage banks stood at 87% vs 86.1/85.5% YoY/QoQ. Banks have been optimizing their deposit mix in order to augment CoF, with lowering dependence on bulk deposits and prioritizing and working towards improving average CASA balances.

* NIMs surprised positively during the quarter, reversing the trends earlier-than-expected, supporting earnings for banks. This was driven by a sharper improvement in CoF/CoD, offsetting the impact of Jun’25 repo rate actions on lending yields. The impact of TD repricing is yet to fully reflect in the CoF and should benefit NIMs going into H2. In Q2, NIMs have bottomed out, barring further rate cuts. The larger banks reported a contained margin decline (4-11bps), quantum being lower sequentially, supported by prudent liability management. On the other hand, most mid-sized banks (with Bandhan and IDFCFIRSB being outliers) reported a NIM improvement of 10 bps (+/-5bps) while SFBs reported a 10-20bps QoQ improvement (EQSFB being an outlier).

* Core fee income growth was robust across most banks. Moreover, controlled Opex offset the impact of lower treasury income, driving a beat on PPOP (~5% ahead of our estimates).

* Slippages during the quarter were meaningfully lower sequentially, driven by improving unsecured portfolios. The stress in the unsecured portfolios has eased across most segments (MFI, CC, and PL) and geographies (primarily TN and KA), and management commentary around it gradually normalising over H2 is encouraging. Asset quality in most secured portfolios (ex-retail CV) and corporate portfolios continues to hold up well. Resultantly, credit costs declined significantly in Q2 and were ~45% lower QoQ for our coverage universe banks, further aiding earnings growth. Consequently, faster than expected NIM recovery and declining credit costs upfronted earnings recovery (~15% higher than our estimates), contrary to our expectations of another weaker print in Q2. Our coverage banks delivered a 5/2% YoY/QoQ PAT growth during the quarter.

Green Shoots on Growth Visible; Overall H2 Outlook Optimistic

* During the quarter, disbursement growth across most financiers improved, partially aided by the festive season and some consumption boost from the GST rate rationalization. Our under-coverage NBFCs (across financiers) reported a healthy AUM growth of 20/4% YoY/QoQ, largely in line with our estimates. Within our coverage universe, growth was led by diversified Financiers (+23/5% YoY/QoQ), Vehicle Financiers (18/3% YoY/QoQ), and Housing Financiers (+11/3% YoY/QoQ). Microfinanciers’ AUM was flat QoQ. Within the gold financiers’ AUM growth (flat YoY/+4% QoQ), primarily driven by gold AUM growth (+29/9% YoY/QoQ), which continued to remain robust, with renewed focus on the higher ticket-size segment. While concerns around SME, especially unsecured SME, have persisted, compelling lenders to trim exposure to the segment, managements have remained upbeat around demand buoyancy in the gold loans, vehicles segments following the GST rate rationalization and a growth recovery in MFI.

* Divergent trends were visible amongst financiers on margins. Within Diversified Financiers, while BAF maintained its margins, MASFIN witnessed a sharperthan-expected margin contraction. Similarly, while CANF reported a surprise margin improvement, Aptus’ NIMs contracted (due to a policy change). Gold Financier – MANAPPURAM continued its margin contraction on the back of yield rationalization, offsetting the impact of lower CoF. Microfinancier CAGRAMEEN reported a sharp improvement in margins supported by lower interest reversals and CoF improvement, while Vehicle Financiers too reported a healthy margin improvement led by utilisation of excess liquidity and lower CoF. The positive movement on CoF is expected to continue in H2 and early FY27 (for certain financiers). NBFCs under our coverage reported NII growth of 15/5% YoY/QoQ, in line with our expectations.

* The concerns around the asset quality of Microfinanciers continued to settle, with normalisation trends gradually being visible and outlook turning positive as green shoots on collections and delinquency levels are visible. The states of KA and TN have also seen encouraging signs of recovery. The impact of extended monsoon and slower economic activity was visible on borrower cash flows (CF), which weighed on the asset quality of Vehicle financiers. While CANF reported improvement in asset quality, Aptus’ asset quality deteriorated owing to a proactive accounting policy change w.r.t write-offs. With credit costs a shade lower vs expectations (~3% lower than our expectations), NBFCs under our coverage reported an earnings growth of 12/4% YoY/QoQ.

Many Hits, Fewer Misses

* For Credit Card Issuers (SBICARD), CIF growth remained modest with the company continuing to adopt a cautious approach in new customer sourcing, while Spends growth was better than expected and grew by 31/15%, driven by healthy traction on retail spends, corporate spends gaining momentum gradually, and further supported by the festive season. SBICARD witnessed an adverse movement in receivables mix, with mi of interest earnings assets declining QoQ. Despite the sharp mix shift towards transactors, NIMs remain steady QoQ at 11.2%. Yields declined by 50 bps QoQ; however was offset by a sharper CoF improvement of 70 bps QoQ. Asset quality, which has been a cause of concern, remained steady, while credit finally turned the corner. SBIC’s credit cost concerns appear to be easing, as Stage 2 assets, forward flows, and slippages continue to decline.

* Life Insurer (SBILIFE) reported a good quarter, reporting NBP grew by 27/52% YoY/QoQ. Gross Premium (GWP) stood at Rs 250.8 Bn, ahead of our expectations, registering a 23/41% YoY growth. VNB margins improvement was aided by a shift towards higher margin products, with strong growth in the non-PAR, Protection, and PAR business. EV stood at Rs 760 Bn (+15/2% YoY/QoQ). 13th-month persistency for H1FY26 stood at 87.1% vs 86.4% YoY, due to the company’s focus on improving the quality of business and customer retention. 61st month persistency stood at 60.6% vs 61.9% YoY.

* Asset Management Company – NAM reported a good set of numbers. The company’s MF QAAUM growth of 20/7% YoY/QoQ. MF QAAUM market share improved by 22/2bps YoY/QoQ. The share of Equity AUMs inched up to 49.9% vs 49.2% QoQ. Equity AUM market share declined by 17bps QoQ and stood at 7.13% vs 7.04% QoQ. SIP flows were strong and stood at Rs 107.2 Bn (+19/10 YoY/QoQ) during the quarter. SIP portfolio grew by 12/1% YoY/QoQ. The company has the largest unique customer base of 21.9 Mn vs 21.2 Mn QoQ with a market share of 38.4%, flat QoQ. Revenue growth was in line with our expectations and decreased by 8% QoQ and was flat YoY, mainly owing to lower other income driven by weak equity markets and higher bond yields. Yields (as % of AUM, calc) stood at 36bps, flat QoQ. Operating profit growth was healthy at 15/11% YoY/QoQ. Operating profit margin (calc.) stood at 65.3% vs 65.5/64.0% YoY/QoQ. PAT de-grew by 4/13% YoY/QoQ.

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