India`s banking sector to see turnaround in profitability in Q3 FY26
After a challenging first half marked by margin compression and falling loan yields, India’s banking sector is set to turn the corner in the third quarter of FY26 (3QFY26), a report said on Thursday.
Private and public sector banks are entering a transition phase, where lagged benefits of deposit repricing, systemic liquidity infusion, and improving asset quality start to lift earnings, Motilal Oswal Institutional Equities said in a report.
As per the report, the recovery will be gradual but meaningful, setting the tone for FY27’s double-digit earnings growth.
Loan yields may decline amid a decline in the weighted average lending rate (WALR), but not equally.
While WALR on fresh loans fell for the system, private banks managed a month-on-month uptick, showing tactical flexibility. In contrast, public sector banks experienced a sharper 30 basis point decline over three months, the report stated.
Most banks have cut savings account (SA) and term deposit (TD) rates by 20–100 basis points across tenors, with a deeper impact expected in the second half of FY26.
With repo rate cuts behind and liquidity support ahead, net interest margins (NIMs) are expected to stabilise and earnings to pick up from the third quarter onwards.
As per the report, asset quality pressures are easing -- especially in retail unsecured and microfinance institution (MFI) portfolios—providing room for provision write-backs
Despite a drop in current account savings account (CASA) ratios across the board, banks with stronger liability profiles are better positioned to navigate margin pressures.
Meanwhile, aggregate private banks’ Pre-Provision Operating Profit (PPOP) is expected to rise from Rs 698 billion in 1QFY26 to Rs 831 billion in 4QFY26, driven by a broad recovery in earnings, the report anticipated.
The report said that there will be a strong rebound in FY27 for the banking sector.
"Private bank earnings growth is expected to jump to 21.7 per cent in FY27 from 6.9 per cent in FY26, led by margin recovery and lower credit costs," the report stated.
