NIM Recovery Remains Elusive for Banks Even in Q1 Despite Easing Funding Costs: Analysts

Banks are likely to report largely stable to lower net interest margins in the June quarter as the benefits of deposit repricing only partly offset pressure from lower-yielding corporate loans and elevated bulk deposit costs, according to brokerage reports.

Brokerages said the impact of the earlier repo rate cuts has largely played out, with external benchmark-linked loans absorbing most of the transmission. While banks have begun repricing deposits, funding costs remain relatively high and are expected to keep margins range-bound in the first quarter of FY27.

Motilal Oswal said state-owned lenders' margins are likely to remain broadly stable in a narrow range, while private banks are expected to report a mixed performance, with HDFC Bank, ICICI Bank and Axis Bank likely to post a marginal decline in net interest margins (NIMs) versus the March quarter, even as some mid-sized lenders may see modest expansion.

Systematix Research also expects NIMs across its coverage universe to remain broadly stable or witness marginal sequential compression, while Dolat Capital estimates around a 0.05 % decline for its banking coverage.

Analysts said expected inflows into Foreign Currency Non-Resident (Bank) or FCNR(B) deposits could provide some relief to funding conditions in the coming quarters.

According to Dolat Capital, bankers are expecting around $ 50 billion of FCNR(B) inflows, equivalent to about 1.8 % of deposits, by August under the scheme valid till September, with the benefits likely to become visible from the second quarter. Motilal Oswal also said the FCNR route should provide some relief and help deposit mobilisation till September 2026.

Despite the pressure on margins, banks are expected to deliver healthy earnings growth in the June quarter, supported by robust loan growth and lower provisioning costs, analysts said.

Brokerages expect banks to deliver profit growth in the range of 9-14 % year-on-year. However, some expect profit may fall on a quarterly basis.

It can be noted that the banks' NIMs have been under pressure over the last few quarters, especially after the RBI turned to cutting interest rates in 2025 as inflation conditions eased.

The pressure on NIMs impacts the core income of banks.

Deposit mobilisation, however, continues to remain a challenge for lenders as loan growth outpaces deposit accretion.

Banking system credit expanded 17.7 % year-on-year as of June 15, 2026, while deposit growth stood at 12 %, pushing the system credit-deposit ratio to around 83.4 %.

Analysts said competition for retail deposits remains intense, forcing banks to rely more on wholesale deposits even as term deposit rates stay relatively sticky.

In the provisional numbers, the pressure on the low-cost deposits of state-owned banks was visible with Union Bank's CASA ratio declining marginally to 35.10 % from 35.51 % a year ago, while Central Bank of India's CASA ratio fell to 46.61 % from 46.88 %.

Indian Bank's domestic CASA ratio also eased to 39.64 % from 39.67 % at the end of March.

Brokerages also expect treasury performance to improve modestly during the quarter.

According to Systematix, treasury income will remain flat to better sequentially after government security yields softened from their peak during the quarter.

Corporate lending emerged as a key driver of banking credit growth during the quarter, marking a shift from the retail-led expansion seen in recent years, which puts further pressure on the NIMs.

Systematix said banking system advances grew 17.7 % year-on-year, driven by broad-based momentum across services, industry and retail segments.

Lending to the industrial sector accelerated to 17.5 % from 6.2 % a year earlier, while services credit grew 20.4 %, led by a 33.7 % jump in lending to non-banking financial companies.

Retail credit also remained healthy, growing 15.4 % year-on-year.

Provisional business compiled by PTI released by nine state-owned lenders for the quarter ended June 30 showed loan growth ranging from around 12 % to nearly 29 % year-on-year compared to deposit growth of 3.5-16 %, reflecting sustained credit demand despite a slower pace of liability mobilisation.

Asset quality is expected to remain resilient even though fresh slippages may rise sequentially due to seasonal stress in agriculture and select retail portfolios.

Analysts said stress in unsecured retail loans and microfinance portfolios has continued to ease, while credit costs are likely to remain benign for most lenders.