Indian Banks to See Strong Profit Growth in Q2FY27
JM Financial report predicts healthy PAT growth for Indian banks in Q2FY27, despite persistent funding pressures and margin concerns.
The Indian banking sector is poised for a period of robust profitability in the second quarter of fiscal year 2027. According to a recent report by JM Financial, banks are expected to post healthy Profit After Tax (PAT) growth, driven by strong balance sheet expansion and low credit costs. However, this optimistic outlook comes with a cautionary note regarding persistent funding pressures and potential margin compression.
Loan and Deposit Momentum
The banking industry has seen a significant acceleration in both lending and savings. The report highlights that loan growth has climbed to 19.1 per cent year-on-year, while deposit growth has reached 15.8 per cent. This growth has been bolstered by a significant increase in the mobilization of Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits.
Key observations from the growth trends include:
- Private vs. PSU Banks: Private sector banks are leading the charge in deposit mobilization, reporting an 18.7% year-on-year growth, significantly outpacing the 13.1% growth seen in Public Sector Undertaking (PSU) banks.
- Credit-Deposit (CD) Ratio: The aggregate CD ratio has risen by approximately 70 basis points to reach 86.7 per cent, reflecting the intense competition for funds.
- System-wide Data: RBI data as of September 15, 2026, showed credit and deposit growth at 18.1 per cent and 17.3 per cent respectively, with a system-wide CD ratio of roughly 81 per cent.
The FCNR(B) Factor and Margin Pressures
While the banking system liquidity remains comfortable—with a surplus of Rs 4.7 trillion recorded by the end of September 2026—the report warns of looming challenges. The heavy reliance on FCNR(B) deposits is a double-edged sword.
JM Financial cautions that as these FCNR(B) inflows begin to moderate, the elevated CD ratios could lead to sustained funding pressures. Furthermore, Net Interest Margins (NIMs) are expected to face sequential declines across most banks. This squeeze is attributed to two primary factors:
- The time lag required to effectively deploy the massive influx of FCNR(B) funds.
- Muted growth in low-cost Current Account and Savings Account (CASA) deposits.
Additionally, rising yields may put downward pressure on treasury income, further complicating the margin outlook.
Stable Asset Quality and Operating Efficiency
Despite the challenges in margins, the overall health of bank balance sheets appears stable. The report notes that stress in unsecured retail and microfinance portfolios continues to ease. Asset quality remains a bright spot, with gross non-performing assets (GNPAs) showing improvement and collection efficiency remaining high at approximately 99 per cent.
On the operational side, banks are expected to see a boost in pre-provision operating profit (PPoP), projected to grow by about 8 per cent. This is supported by the fact that operating expenses are expected to rise by only 7 per cent year-on-year, a rate significantly lower than the overall balance sheet growth.