The report emphasized Gedempte Growth in Netto Interest income (NII) in the banking sector due to a weak expansion of credit. | Photocredit: Venkatachalapathy C
The Indian banking sector witnesses a steady pick -up in the deposit growth, but banks will probably report a decrease in their net interest rate margins (NIM) in the first quarter of FY26, according to a report by Phillip Capital.
The report noted that the growth of systemic deposits is gaining strength, which improves the credit-to-deposit ratio. Based on business updates released so far, the total credit growth is 0.4 percent on a sequential basis.
It stated: “Bank universe will see 1 percent yoj (-1.5 percent qoq) growth in nii. Sector NIM, 10 BPS QoQ /30 BPS Yoy will fall if the costs of funds remain stable.”
The report emphasized Gedempte Growth in Netto Interest income (NII) in the banking sector due to a weak expansion of credit. The total NII is expected to grow only 1 percent on an annual basis (JoJ) and will fall by 1.5 percent QoQ.
Sector-wide NIM is expected to fall with 10 basic points (BPS) QoQ and 30 BPS Yoy, because the costs of funds remain largely stable and the return of repo-linked loans is decreasing.
However, it also noted that the banks of the private sector have shown stronger performance with a growth in the loan of 0.5 percent quarter-on-quarter (QOQ) and the deposit growth of 1.3 percent QoQ. As a result, their credit-to-deposit ratio is 92 percent, which reflects a decrease of 0.8 percent qoq.
Banks (PSBs) in the public sector, on the other hand, have a modest growth of 0.2 percent QoQ loan, while their deposit levels remained flat. The credit-to-deposit ratio for PSBs remained stable successively at 78 percent.
Private banks will probably register a decrease of 1.9 percent and a QoQ drop of 0.8 percent in NII. In the meantime, PSBs can witness a decrease of 0.3 percent yoj and a sharper decrease of 2.4 percent qoq in NII.
In the field of profitability, banks are expected to report modest profit growth after tax (PAT), supported by lower credit costs.
The total pat is expected to grow by 3.5 percent yo -yo and 0.8 percent qoq. Under segments, PSBs can place an increase of 7 percent in pats, but a decrease of 4.1 percent QoQ, while private banks could register 1.4 percent yej and 4.2 percent QOQ growth.
Credit costs are standardized, helped by improving the quality of the assets. The report estimated the credit costs on 59 BPS for Q1 FY26, against 64bps in Q4 FY25 but against 52 BPS in Q1 FY25.
The report outlined that although the deposit momentum is positive, the pressure on margins and core income will be an important watch point for the banking sector in the coming quarterly results.
Published on July 10, 2025
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