Banks Set for Double-Digit Profit Growth in Q1FY27 Despite Margin Headwinds: Emkay Global Financial Services
Emkay Global Financial Services in its latest report on BFSI – Banks Q1FY27 Preview cited that India's banking sector is expected to begin FY27 on a healthy note, with strong loan growth and resilient asset quality supporting earnings despite temporary pressure on margins and treasury income. Emkay expects the banking sector under its coverage to report 12.2% YoY growth in profit after tax (PAT) for the June quarter, reflecting the continued strength of core banking operations. On a sequential basis, however, profits are likely to decline 2.3%, primarily due to elevated funding costs, margin compression and weaker treasury income.
The report suggests that while banks continue to face short-term pressure on profitability owing to a higher cost of funds, the underlying business environment remains healthy. Robust credit demand, improving liquidity conditions and stable asset quality are expected to support a gradual recovery in margins from the second quarter of FY27.
Credit Growth Remains Robust Despite Liability Challenges
Credit demand across the banking system has remained strong, with system credit growth at 17.7% YoY as of mid-June 2026. Growth continues to be driven by sustained lending to corporates, NBFCs, MSMEs and select retail segments such as vehicle finance and gold loans.
Deposit mobilisation, however, has continued to lag, growing 12% year-on-year, resulting in an increase in the system loan-to-deposit ratio to nearly 83%. This has compelled banks to rely more heavily on higher-cost term deposits and wholesale borrowings, keeping funding costs elevated during the quarter.
Key takeaway: Strong loan demand reflects healthy economic activity, but slower deposit mobilisation has increased funding costs and temporarily weighed on bank profitability.
According to Emkay, these liability pressures are likely to ease from Q2FY27 onwards as FCNR deposit inflows improve system liquidity and enhance funding availability across banks.
Margins Expected to Bottom Out in Q1FY27
Net Interest Margins (NIMs) are expected to remain under pressure during the June quarter, with most banks likely to report a 1-15 basis point sequential decline. Elevated term deposit rates, seasonal interest reversals related to agriculture and Kisan Credit Card (KCC) portfolios, and a higher share of lower-yield corporate loans are expected to weigh on margins.
Despite the near-term moderation, Emkay believes the outlook remains constructive. Lower funding costs, improving deposit accretion and a favourable loan mix are expected to support margin recovery from the second quarter, providing an earnings tailwind over the remainder of FY27.
Asset Quality Continues to Improve
Asset quality remains one of the strongest pillars supporting the banking sector. The report notes that stress across unsecured retail portfolios—including microfinance, personal loans and credit cards—has continued to moderate, while stress in vehicle finance, mortgage-backed lending and other secured portfolios remains well contained.
Although seasonal agricultural and KCC-related slippages may result in a modest sequential increase in fresh slippages during Q1FY27, Emkay expects overall asset quality to remain healthy, with both gross and net non-performing asset ratios continuing their improving trajectory.
The report also highlights that management commentary around the impact of geopolitical developments in West Asia, El Niño-related risks and FCNR deposit inflows will remain key monitorables during the earnings season.
Private Banks Expected to Lead Earnings Growth
Emkay expects private sector banks to deliver relatively stronger operating performance during the quarter, supported by healthy loan growth and resilient core profitability. Public sector banks are also expected to report healthy year-on-year earnings growth, although sequential performance may be impacted by softer treasury income and marginally higher provisioning.
Among the banks under Emkay's coverage, Axis Bank, HDFC Bank, IndusInd Bank and IDFC First Bank are expected to report healthy profitability within the private banking space. Among public sector lenders, Canara Bank and Indian Bank are likely to outperform, while State Bank of India is expected to post a relatively modest quarter and Bank of Baroda may report comparatively weaker earnings.
Sector Outlook
Emkay Global Financial Services remains positive on the banking sector, particularly large private sector banks and select small and mid-sized lenders, citing sustained credit demand, easing funding pressures, resilient asset quality and improving margin outlook as key drivers for earnings over the coming quarters.
As funding costs gradually moderate and deposit growth improves, the sector is expected to be well positioned to deliver stronger profitability through the rest of FY27, supported by healthy balance sheet growth and disciplined risk management.
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