Indian banks are poised to report significant revenue growth for the April-June quarter, driven by strong credit expansion across various sectors. However, analysts are cautioning that Net Interest Margins (NIMs) are likely to face pressure due to elevated funding costs, potentially tempering overall profitability.
Several major private lenders, including HDFC Bank, ICICI Bank, Axis Bank, and Kotak, alongside a selection of mid-sized peers, are scheduled to announce their quarterly results this week. The anticipation comes amidst a robust lending environment that continues to outpace deposit growth.
Robust Credit Growth Sustains Momentum
Recent data from the Reserve Bank of India (RBI) indicates that the banking sector's credit growth surged to 17.7% by mid-June. Analysts at Mirae Asset Sharekhan project a 17.3% year-on-year credit growth for banks, with public sector banks potentially outperforming their private sector counterparts at 17.8% compared to 16.7%.
Key drivers for this expansion include sustained traction in lending to micro, small, and medium enterprises (MSMEs), large industries, and the services sector. Additionally, a rise in bond yields during the first quarter may have prompted an increase in corporate borrowings from banks, as noted by Nitin Aggarwal, a research analyst at Motilal Oswal Financial Services. Higher working capital requirements and a shift from capital markets to bank financing by corporates have also contributed to non-retail loan growth.
Funding Costs Squeeze Net Interest Margins
Despite the strong credit momentum, banks continue to grapple with challenges in deposit mobilization. Deposit growth lags behind loan growth, with Mirae Asset Sharekhan estimating a 13.2% year-on-year increase, while system-wide deposit growth stands around 12%.
This disparity forces banks to rely more on wholesale deposits and intensifies competition for low-cost funds. Bino Pathiparampil, Head of Research at Elara Capital, highlighted that "NIMs will remain under pressure as elevated funding costs continue to weigh on margins." Analysts expect top private sector banks to experience a marginal decline in margins, while state-owned lenders may report relatively stable, albeit narrow, margins.
Commentary from bank management regarding deposit repricing strategies, funding costs, liability mix, and the projected NIM trajectory for FY27 will be crucial points of discussion during earnings calls.
Asset Quality Remains Stable, Future Risks Monitored
Indian banks have largely de-stressed their balance sheets over recent years, leading to a reduction in non-performing assets (NPAs). Asset quality is expected to have remained stable in the April-June quarter. Unsecured loan segments, such as personal loans and credit cards, which had previously raised concerns, are now showing signs of normalization. Early-bucket delinquencies in the microfinance industry (MFI) have also held steady.
However, analysts are closely monitoring potential risks. The ongoing conflict in West Asia poses a possible second-order impact on corporate India, particularly for MSMEs. Furthermore, the anticipated El Nino conditions could affect the monsoon season, impacting agriculture and, consequently, farm loan portfolios. These factors will require careful observation in the coming months.