The Indian banking sector is poised for steady earnings growth in the fourth quarter of financial year 2025-26 (Q4 FY26), with private sector banks expected to demonstrate stronger net profit growth compared to their public sector counterparts. Despite ongoing global volatility, including the conflict in West Asia, the sector's asset quality is largely anticipated to remain stable, though potential risks are being closely monitored.
Private Banks Lead Profit Projections
Analysts from Motilal Oswal Financial Services project private banks to report an 11.9% year-on-year (YoY) growth in profit after tax for Q4 FY26. ICICI Securities offers an even more optimistic estimate, forecasting close to 15.5% net profit growth for private lenders, alongside an 11.2% rise in net interest income (NII). In contrast, public sector banks (PSBs) are expected to see a more modest 2.1% growth in profit, partly due to muted treasury gains amidst rising bond yields.
The Q4 earnings season for the banking sector is set to commence this week, with major private players like HDFC Bank and ICICI Bank scheduled to release their results on Saturday. YES Bank will also report its earnings, marking the first under its new MD and CEO, Vinay Tonse.
Margins and Funding Costs
Net interest margins (NIMs) are expected to show divergent trends across the sector. Large private banks such as ICICI Bank and HDFC Bank may report flat margins, while Axis Bank and Kotak Mahindra Bank could see a decline. Mid-sized banks, including AU Small Finance Bank, Bandhan Bank, Equitas SFB, and IDFC First Bank, are generally considered better positioned for NIM expansion.
The 25 basis point repo rate cut implemented in December 2025 is anticipated to be fully reflected in lending yield transmission during Q4. However, funding costs remain elevated, as most banks have not yet reduced their term deposit or savings account rates following the rate cut.
Asset Quality and Geopolitical Risks
Over the past few years, Indian banks have significantly improved their non-performing asset (NPA) ratios. The general outlook for asset quality in Q4 FY26 remains favorable, with stress in unsecured loans largely behind and secured and corporate loan segments holding up well. However, the ongoing conflict in West Asia presents a key monitorable.
The conflict has led to increased oil prices and disrupted supply chains, impacting sectors reliant on gas and crude oil, as well as those with exposure to the region. Analysts, including Jai Prakash Mundhra of ICICI Securities, are closely monitoring early delinquencies, particularly within small and medium enterprises (SMEs) which are more susceptible to global macroeconomic shifts. Dnyanada Vaidya of Axis Securities also emphasized the importance of management commentary regarding potential risks from geopolitical turmoil and its implications for asset quality.
Deposit Mobilization Remains Crucial
Given that deposit growth has consistently lagged credit growth, management commentary on strategies for deposit mobilization, especially the accretion of Current Account and Savings Account (CASA) deposits, will be a critical area of focus for analysts and investors during the earnings calls.