Banking Sector Update : Jul-Sep 2025 Earnings Preview - Margins to dip QoQ but may bottom by Gaurav Jani Research Analyst at PL Capital
Margins to dip QoQ but may bottom out
Banks under our coverage are likely to see a mixed quarter; while core earnings (ex-IIB) may increase by 3.1% QoQ to Rs554.5bn (-9.3% QoQ in Q1FY26) core PPoP might slightly decline. Loan/deposit growth is expected at +3.5%/+2.3% QoQ (0.6% each in Q1FY26 as Q1 is seasonally weak). LDR may rise sequentially by 103bps to 84.3%. Owing to repo rate reduction of 75bps in Q1, calculated NIM might decline by 7bps QoQ to 3.19% (-5bps in Q1FY26); however, margins might bottom out for the sector in Q2. Hence sequential NII growth would be a key monitorable. As Q1 seasonality could reverse, fees may increase by 5.2% QoQ, to Rs398.7bn, which would be offset by 5.9% QoQ rise in opex to Rs933bn. Core PPoP may be Rs903bn (-0.8% QoQ) owing to weaker NII and rise in opex. Gross slippage ratio and provisions might reduce as Q1 generally sees a spike in agri slippages while for banks like AXSB and KMB elevated stress levels would normalize. Banks’ PAT may decrease by 6.7% QoQ to Rs645.1bn. Among our coverage universe, we prefer SBI and KMB.
* System growth could be 10% YoY in Sep’25: System credit (incl. HDFCL) grew by +9.9% YoY in Aug’25, which has improved since May’25 mainly led by better offtake in corporate, NBFC and housing; agri continues to decelerate. Industry/services grew by 6.5%/10.6% YoY each and large industries grew by +1.8% YoY. Agri loans grew by +7.6% YoY. Within services, NBFC accretion is improving as growth rose from -0.3% YoY in May’25 to 3.4% YoY in Aug’25. Retail credit growth came in at 11.8% YoY (11.1% in May’25) driven by housing, gold and PL. System credit (incl. HDFC) could grow by ~10% YoY in Sep’25, while system deposits were up by 9.5% YoY as at 19th Sep’25. Coverage banks may see loan growth/deposits growth of 10.8%/9.7% YoY each in Q2FY26.
* Margins may improve: Loan yields may decline due to repo rate cut which would be partly offset by fall in cost of funds owing to reduction in SA/TD rates. As a result, NIM (calc.) could decline by 7bps QoQ to 3.19%. NII may increase by 1.0% QoQ compared to loan growth of +3.5%. Due to seasonality in Q1, fees could increase by 5.2% QoQ that would be offset by 5.9% QoQ rise in opex. Core PPoP may come in at Rs903bn (-0.8% QoQ).
* Slippages and provisions might decline QoQ: Since Q1 generally sees higher delinquencies due to agri stress (mainly large banks), slippages are expected to fall QoQ. Slippage ratio is expected at 1.1% (1.36% in Q1FY26). As a result, GNPA ratio could improve by 7bps QoQ to 1.82%. Provision costs may reduce by 14bps QoQ to 54bps. PCR for coverage banks may remain stable at 75%.
* Core PAT to improve QoQ: Core PAT for our coverage banks is likely to increase by 3.1% QoQ to Rs554.5bn due to lower provisions. Excluding IIB, large private banks would deliver better core profitability. PAT may fall to Rs645.1bn (-6.7% QoQ).
* Private banks likely to perform better: While growth would be superior for private banks, NIM movement would be better for PSUs. However, core earnings growth for private banks (large and midcaps) would be better than PSUs since reduction in provisions would be sharper over Q1FY26 credit costs.
Top Picks:
* State Bank of India: With credit growth likely to pick-up in H2FY26 and FY27, SBI is better placed to other PSU and private banks due higher unsecured and NBFC exposure respectively. Bank has usually delivered better than system growth and recent capital raise of Rs250bn may further support growth. Due to higher contingent provision buffer compared to other PSUs, SBI is better placed to navigate the transition to ECL. Core earnings growth could be strong at 22% YoY for FY27E. Stock is currently valued at 1.1x on Mar’27 core ABV; we maintain multiple of 1.3x and retain ‘BUY’ with TP at Rs960.
* Kotak Mahindra Bank: Lifting of RBI embargo could lead to better loan and deposit growth; bank also plans to increase share of unsecured loans from 10.5% to 15% which would cushion NIM. Core earnings growth is expected to be 23.2% YoY in FY27E with core RoA/RoE of 1.8%/11.0%. We keep multiple at 2.4x on Mar’27 core ABV. Retain ‘BUY’ with TP at Rs2,350
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