Banks expected to post steady quarter with healthy loan growth
Deposit mobilisation likely improved at large private lenders, particularly Axis Bank and HDFC Bank
On stock preferences, brokerages seem to largely prefer private banks
Indian banks are expected to report another steady quarter for the three months ended June 2026, with healthy loan growth, stable asset quality and contained credit costs supporting earnings.
However, brokerages expect elevated funding costs and continued pressure on net interest margins (NIMs) to remain key challenges.
1 June 2026
Get the latest issue of Outlook Business
JM Financial expects the banks under its coverage to report around 14% year-on-year growth in profit after tax (PAT) during the June quarter, supported by steady business expansion and benign credit costs despite continued pressure on margins.
The brokerage also expects net interest income (NII) growth to improve to nearly 11% yoy, helped by robust loan growth. Lower government bond yields are likely to boost treasury gains, while operating expenses are expected to remain under control as banks benefit from operating leverage.
Motilal Oswal Financial Services (MOFSL) remains positive on the sector over the medium term, projecting earnings across its banking coverage universe to grow at a 15% compound annual growth rate (CAGR) between FY26 and FY28.
It expects private sector banks to outpace public sector lenders, forecasting earnings CAGR of around 20.5% for private banks compared with 9.6% for PSU banks.
Loan Growth Remains Strong, But Deposits Lag
Both brokerages identified credit growth as the principal driver of earnings.
JM Financial's analysis of provisional business updates from 28 banks showed aggregate loan growth of around 16.4% yoy, while deposits grew 12.3%, resulting in higher credit-deposit (CD) ratios across the banking system.
A rising CD ratio indicates that loan growth is outpacing deposit mobilisation, increasing banks' reliance on wholesale funding sources, which are generally more expensive than customer deposits.
MOFSL estimated systemic credit growth at 17.7% yoy by mid-June, supported by stronger corporate borrowing, resilient retail demand and continued momentum in MSME and gold loans. The brokerage expects credit growth to moderate to around 14% during FY27 while remaining healthy overall.
JM Financial also noted that deposit mobilisation improved at several large private lenders, particularly Axis Bank and HDFC Bank, although deposits continued to trail advances.
Margin Pressure Likely To Continue
Despite healthy lending activity, both brokerages expect NIMs to remain under pressure.
On QoQ basis, sequential NIM compression of 5-10 basis points is expected, JM Financial said, attributing the decline to stronger growth in lower-yield corporate lending, increased issuance of higher-cost certificates of deposit (CDs) and seasonal agricultural slippages.
Margins are likely to contract by 7-8 basis points for ICICI Bank and Axis Bank, 2-3 basis points for HDFC Bank, while remaining broadly stable for Kotak Mahindra Bank, it said.
MOFSL also expects a modest decline in margins for HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank. It sees sharper pressure on mid-sized private lenders, forecasting NIM contraction of around 13 basis points for AU Small Finance Bank, 10 basis points for Bandhan Bank and 14 basis points for Equitas Small Finance Bank, while PSU bank margins are expected to remain largely stable.
Asset Quality Remains Resilient
Asset quality is expected to remain broadly stable during the quarter, although both brokerages flagged seasonal stress in agricultural and microfinance portfolios.
Credit costs are expected to remain contained as provisioning buffers built in the March quarter continue to provide support, JM Financial noted, adding that trends are improving in unsecured retail and microfinance portfolios, with healthy collection efficiencies aiding asset quality.
Similarly, MOFSL expects asset quality to remain stable but said higher input costs could eventually affect business banking and commercial vehicle portfolios if geopolitical tensions persist.
Brokerages Favour Pvt Bank Stocks
On stock preferences, both the brokerages seem to largely prefer private banks.
JM Financial's top picks are ICICI Bank, Axis Bank, State Bank of India (SBI), Ujjivan Small Finance Bank, DCB Bank and City Union Bank.
MOFSL continues to prefer ICICI Bank, HDFC Bank, State Bank of India and AU Small Finance Bank, citing healthy credit growth, resilient asset quality and a gradual easing in funding costs over the medium term.
