IGI Logo

Over the weekend, around 12 banks and 4 NBFC/HFCs released their 2QFY26 provisional updates, with loan growth being strong and higher than JMFe, especially for large banks. Aggregate loan growth for the sample of 12 banks stood at +9.4%/+3.6% YoY/QoQ vs. ~2.3% QoQ for the sector (till 19th Sep), highlighting that credit expansion in the last few days of Sep has been steep. Large banks surprised the most (HDFCB +4.4% QoQ, KMB +4.0% QoQ, BoB +6.0% QoQ). Deposit growth, however, remained tepid at +9.3%/+2.1% YoY / QoQ, broadly mirroring system trends and leading to an uptick in the CD ratio by ~130bps QoQ to 86% (System CD ratio was up ~140bps QoQ in 2QFY26, till 19th Sep). We expect the widening gap between credit and deposit growth to provide near-term NIM support. Mid-banks either reported in-line credit growth (like AU SFB 4.5% QoQ) or weak credit growth (like IIB down 1.9% QoQ). On the NBFC front, performance was mixed with Bajaj Finance outperforming on AUM growth, L&T Finance reporting in-line disbursement growth, and Mahindra Finance disappointing both on disbursements/asset quality side. We continue to prefer Banks over NBFCs and large caps over mid-caps in financials. ICICI, HDFCB, SBI, BoB, BAF remains our preferred large cap names in the space.

* Large banks report stronger-than-expected credit growth: Among large banks, HDFC Bank reported loan growth of 4.4%/+9.9% QoQ/YoY to INR 27.7trln (outperforming our growth estimate of 2.0% QoQ), while its deposits rose modestly by 1.4% QoQ. Kotak Mahindra Bank posted a healthy 4.0% QoQ rise in advances (beat on JMF growth estimate of +3% QoQ) and 3.1% QoQ growth in deposits. BoB also reported strong loan growth of 6% QoQ and deposit growth of 4.5% QoQ.

* Mid-banks report mixed trends: IndusInd Bank disappointed with 1.9% QoQ contraction in its loan book (JMFe: -0.5%). Bandhan Bank delivered 4.8% QoQ loan growth and 2.1% QoQ deposit rise, led by steady trends in non-MFI portfolios. Among SFBs, AU SFB reported 4.5% QoQ credit growth (in line with our growth estimates) and 3.8% QoQ deposit accretion, maintaining its strong execution track record. Ujjivan SFB (+3.9%) and Equitas SFB (+4.1%) also reported strong but in-line credit growth.

* NBFCs - BAF outperforms; MMFS disappoints: In the NBFC segment, Bajaj Finance (BAF) delivered another strong quarter with AUM up +4.7%/+23.6% QoQ/YoY. Its subsidiary Bajaj Housing (BHFL) reported strong numbers with disbursement/AUM QoQ growth of ~8.5%/5.2% in 2QFY26. L&T Finance (LTFH) reported retail loan growth of +4.7%/+17% QoQ/YoY, in line with expectations. In contrast, Mahindra and Mahindra Finance (MMFS) posted weak numbers with disbursements at INR 135bn (+2.6% YoY).

* NIM outlook: Rising CD ratio provides tailwind to margins: Overall, the provisional data underscores a healthy lending environment led by large private banks and top-tier NBFCs. However, deposit growth remains tepid, leading to an increase in the CD ratio, which should support NIMs. We expect NIMs to bottom out in 2Q for banks (untill another rate cut happens) and, thus, earnings trajectory should improve from 3Q onwards for banks.

* Asset quality - Improvement but not out of the woods yet for mid banks/NBFC/MFIs: MMFS reported increase in Stage 3 assets by ~15bps QoQ in 2QFY26, which should lead to higher credit cost for it. For Ujjivan, there was a very gradual improvement in CE in microbanking (99.46% in Jul’25 to 99.50% in Sep’25). GNPA improved but only by ~6bps QoQ. For Equitas as well, CE in MFI inched upto 99.59% in Sep’25 vs. 99.43% in Jul’25, leading to a decline in 1- 90dpd from 8.06% in Jun’25 to 5.36% in Sep’25.

* Prefer banks over NBFCs and large caps over mid-caps in financials: We expect large banks’ earnings to bottom out in 2Q, and earnings growth should pick up from 3Q onwards. With valuation remaining benign for large banks and expected pickup in earnings growth, we like large banks amongst financials. ICICI, HDFCB, SBI, BoB, BAF remains our preferred large cap names in the space.

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361