Indian Bank Profits Could Surge 25% in Q2FY27 Despite Margin Pressure
Emkay Research predicts a 25.4% surge in Indian bank net profits for the July-September quarter despite pressure on lending margins.
Indian banks are poised for a significant windfall in the July-September quarter, with net profits expected to climb by approximately 25.4 per cent compared to the previous year. According to a recent report by Emkay Research, this surge is driven by robust credit growth and a reduction in loan loss provisions, even as banks grapple with shifting deposit dynamics.
The Drivers of Profitability
The brokerage highlights that while certain factors might act as headwinds, the overall outlook for banking profitability remains strong. Several key elements are working in tandem to bolster the bottom line:
- Healthy Credit Growth: Strong demand for loans continues to fuel income.
- Core Banking Income: Increased earnings from primary banking operations.
- Lower Credit Costs: A projected decline in provisions set aside for potential loan losses.
- System-wide Momentum: As of mid-September, system-wide credit growth stood at 18.1 per cent year-on-year, while deposit growth accelerated to 17.3 per cent.
"Profitability is expected to improve, led by better credit growth, flat/slight drop in margins, and lower credit costs, partly offset by lower treasury gains," the report noted.
The FCNR-B Factor and Margin Compression
The report characterizes the September quarter as a "one-off quarter" due to a massive mobilisation of Foreign Currency Non-Resident (FCNR-B) deposits. While these inflows have accelerated both credit and deposit growth, they bring a temporary challenge: pressure on Net Interest Margins (NIMs).
Because these foreign currency deposits are being integrated into the banking system, margins are expected to see a sequential decline. The impact varies depending on the type of institution:
- Large Private Banks: May experience a margin decline of 7 to 32 basis points.
- Public Sector Banks: Likely to see a more modest fall of 1 to 9 basis points.
A Gradual Recovery Ahead
The immediate pressure on margins is expected to be short-lived. Emkay Research suggests that banks will use these additional funds to repay expensive borrowings and retire high-cost liabilities. As this liquidity is gradually deployed into new loans and as banks benefit from interest rate hikes on floating-rate loans, margins are projected to recover steadily in the second half of the financial year.
It is estimated that it may take approximately two quarters for the banking system to fully absorb this additional liquidity and normalise its funding structure.
Asset Quality and Future Outlook
Despite the fluctuations in margins, the overall health of bank assets appears stable. There is a noted easing of fresh stress in unsecured retail sectors, which includes:
- Personal loans
- Credit cards
- Microfinance
Looking further ahead, the brokerage expects net interest income to grow by 12.5 per cent year-on-year, while pre-provision operating profit is slated to rise by 17.2 per cent. However, caution remains; Emkay continues to monitor external risks such as El Niño and potential drought conditions that could impact the broader economy. As the impact of FCNR-B funding normalises, overall banking system growth is expected to moderate to around 16 per cent in FY27.