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Indian banks’ earnings are expected to grow in Q2FY27.
The second quarter of FY2026-27 is expected to be good for Indian banks. According to a report by Kotak Institutional Equities, the earnings of Indian banks may increase by about 11 percent on an annual basis in the September quarter.
The report also estimates an annual growth of about 11 percent in the net interest income (NII) of banks. However, non-interest income of Indian banks may remain under pressure due to reduction in treasury income.
According to analysts, private sector banks may perform better than public sector banks this quarter. The earnings of private banks are expected to increase by about 20 percent, while the earnings of public sector banks are expected to remain almost stable.
FCNR deposits may impact Indian banks’ margins
FCNR(B) deposits were a key factor in banks’ performance in the September quarter. Banks have raised large amounts of foreign currency deposits under the RBI’s special swap facility.
According to Kotak, a portion of these deposits is yet to be used as loans. In such a situation, banks are currently having to invest this money in investments and short-term placements, where the returns may be relatively low.
For this reason, banks with a higher share of FCNR deposits may see a decline of around 10 to 20 basis points in their net interest margin (NIM) during the second quarter.
Nearly $133 billion in FCNR deposits were raised.
Banks raised significant amounts of FCNR(B) deposits under the RBI’s concessional swap facility. According to the report, Indian banks raised approximately $133 billion through this facility.
This has strengthened the deposit position in the banking system. As of September 15, the banking system’s deposit growth was around 17 per cent annually, while loan growth was recorded at around 19 per cent.
However, the full benefit of this sharp increase in deposits will not be immediately reflected in the earnings of banks. Its impact will depend on how quickly banks deploy these funds into loans and other high-return instruments.
Margin pressure expected to ease in the second half
Kotak believes that margin pressure arising from FCNR deposits is unlikely to last long. As banks start deploying these funds into loans, the benefits of lower funding costs may become visible.
Reducing reliance on expensive wholesale funding sources for banks will also be a key part of this process. The additional liquidity from FCNR can be used to replace older, more expensive funding sources.
Its benefits may become more evident in the second half of FY 2026-27. In such a situation, the current margin pressure is being considered temporary.
Private banks’ performance will be closely monitored.
Kotak estimates that private sector banks’ earnings could increase by approximately 20% during the second quarter. Strong credit growth and better funding position are considered important reasons behind this.
In recent business updates, several private banks have reported strong growth in both deposits and loans. For example, Kotak Mahindra Bank’s total deposits grew 23.2 per cent to about Rs 6.51 lakh crore in the September quarter, while net advances grew 24.7 per cent to about Rs 5.77 lakh crore.
However, the pace of CASA deposits and utilisation of FCNR funds will remain important for private banks going forward. Maintaining a strong share of low-cost deposits could help keep margins stable.
There are currently no signs of a significant decline in banks’ asset quality.
A positive aspect for the banking sector has emerged regarding asset quality. Kotak’s report does not indicate any major decline in the asset quality of banks at present.
Microfinance and some unsecured loan segments had previously experienced pressure. According to the report, the situation in these areas is also showing signs of gradual improvement.
Additionally, the reduction in fresh loan slippages and improvement in recovery is expected to reduce the credit cost of banks. This may further support the earnings of the banking sector in the coming quarters.
Earnings to rise in Q2FY27; utilization of FCNR funds remains crucial
Overall, Indian banks are projected to deliver a performance ranging from stable to improved in Q2FY27. The estimated earnings growth of around 11 per cent is a positive sign for the banking sector, while private banks are expected to perform relatively better.
On the other hand, the large volume of FCNR(B) deposits currently has a double impact on banks. This has strengthened deposit and liquidity conditions, but until these funds are adequately utilised for lending, temporary pressure on NIM may persist.
In the coming quarters, the market will be watching how quickly banks deploy FCNR funds, how deposit costs evolve and where asset quality moves with credit growth.
