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Margin pressure to weigh on earnings

Loan growth muted; treasury remains the key profitability driver

* Credit growth remains muted; expect recovery in 2HFY26: Systemic credit growth slowed to ~9.6% as of 13th Jun’25 amid demand moderation in the retail segment and a cautious growth strategy followed by banks in unsecured loans. With moderation in loan growth, the incremental CD ratio has eased to 74%, though the outstanding CD ratio remains elevated at ~79%. We expect credit growth to sustain at 11.5% YoY in FY26, led by a recovery in 2HFY26.

* Deposit growth stable at 10.4% in Jun’25; funding cost to ease gradually: System deposit growth was stable at 10.4% in Jun’25, although banks continue to face challenges in mobilizing low-cost CASA deposits. With a sharp decline in policy rates, banks are reducing both SA and TD rates. SA rates have declined by 25-100bp since Apr’25 and TD rates have fallen by 20-100bp in the past two months. We expect muted deposit growth in 1QFY26, as the seasonal flow of 4Q unwinds. Deposit costs should begin to ease gradually as liability repricing happens.

* NIMs to decline sharply during 1H; expect trends to improve from 2H onward: With a reduction in benchmark rates, we estimate lending yields to compress across banks, while the moderation in funding costs happens with a lag even as most banks have reduced SA/TD rates. Banking sector NIMs are thus expected to remain under pressure in 1HFY26, with some variation across banks depending upon the quantum of repo-linked loans and the transmission timelines. Thus, we expect double-digit NIM decline for all banks under our coverage in 1QFY26E. However, a phased reduction in deposit rates and a 100bp CRR cut, effective from Sep’25, will enhance liquidity and bring some relief to margins.

* Asset quality broadly stable; unsecured retail (MFI) to witness continued stress: Asset quality trends remain stable for large lenders; however, unsecured retail (MFI) continues to witness elevated stress levels. We thus expect the credit cost differential to persist. Large private/PSU banks should continue to report controlled credit costs, while mid-size lenders with higher exposure to Retail/MFI segments are expected to report elevated provisioning levels, mainly during 1H.

* Estimate 11.1% PAT CAGR over FY25-27E: We estimate NII for our banking coverage universe to report a muted growth at 1.7% YoY (down 0.6% QoQ). PPoP is expected to decline by 2.4% QoQ (up 3.3% YoY). We estimate private banks’ PAT to decline 2.5% YoY (up 2.8% QoQ) and PSU banks to report PAT growth of 4.8% YoY (down 11.7% QoQ). For our coverage universe, we estimate PAT to stay broadly flat YoY (down 4.5% QoQ). Overall, we estimate an 11% CAGR in earnings over FY25-27E.

Private Banks: Earnings to decline 2.5% YoY (9% YoY PAT growth in FY26E)

* For the private banks under our coverage, we estimate PPoP to grow 4.2% YoY/ 3.8% QoQ and PAT to decline 2.5% YoY (up 2.8% QoQ). We estimate ~15% CAGR in earnings over FY25-27E for private banks.

* Estimate NII to grow 3.1% YoY/flat QoQ in 1QFY26: Among large private banks under our coverage, HDFCB’s NII growth is estimated at 6.9% YoY (flat QoQ), ICICI at 7.0% YoY (down 1.3% QoQ), Axis at 1.5% YoY (down 1.2% QoQ), KMB at 5.6% YoY (down 0.8% QoQ), and Federal at 0.2% YoY (down 3.4% QoQ).

* Overall slippages are expected to inch up amid agri seasonality, especially for large private banks. Bureau data indicates that there are signs of easing in early stress and that peak slippages are likely behind, though unsecured retail NPA should remain elevated. We expect credit costs to rise marginally over the year

PSU Banks: PAT growth to moderate sharply to 4.8% YoY

* We estimate PSU banks to report a modest PAT growth of 4.8% YoY (down 11.7% QoQ) amid a decline in NIMs, normalized opex, and higher provisions QoQ due to the benefits of the one-time reversal in provisions on SRs reported in 4Q.

* NII is likely to remain flat YoY (down 1.8% QoQ) owing to a decline in NIMs. We estimate PSU banks to report a 6% CAGR in PAT over FY25-27E.

* Opex is likely to be under control and should follow a normalized trajectory for PSU banks. Treasury performance is likely to be better QoQ amid a sharp decline in G-sec yields.

* Asset quality outlook stable: We expect stable asset quality trends for PSU banks, aided by controlled slippages and robust PCR.

Small Finance Banks: NIMs to fall further; asset quality stress continues

* AUBANK’s PAT is likely to improve by 9.8% QoQ (10.1% YoY) to INR5.5b, aided by a decline in credit costs (down 23% QoQ) as the bank improved PCR during 4Q. NII is expected to grow by 1.9% QoQ (up 11.1% YoY), while NIMs are estimated to decline ~28bp QoQ. Delinquencies in MFI+Cards portfolio are likely to remain elevated, keeping credit cost at higher levels.

* EQUITASB is estimated to report another muted quarter, with PAT likely to decline by 15% YoY (down ~48% QoQ), dragged down by higher provisions and 25bp QoQ decline in margins to 6.88%. Business growth is likely to remain modest at 17.6% YoY/3.0% QoQ.

Payments/Fintech: SBI Cards – Credit cost to stay elevated | Paytm – PAT nearing breakeven

* SBICARDS: Retail spending is likely to see a modest growth, while some pickup in corporate spending is expected. NIMs are likely to improve on the back of rate cuts. Asset quality stress is likely to persist, driving up credit costs. We thus estimate PAT to grow 7.5% QoQ (down 3.4% YoY).

* PAYTM: We estimate 3% QoQ growth in GMV to INR5.3t in 1QFY26. Revenue from operations is likely to remain flat QoQ (up 26% YoY) at INR18.96b, while contribution profit is expected to decline marginally (largely due to UPI incentives in 4QFY25) to INR10.5b. Contribution margin is expected to improve to 55.6%. We expect the company to report marginal profits during 1Q.

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