Indian Banks' Q2FY27 Earnings to Rise 11% Despite Margin Pressure
Kotak Institutional Equities predicts 11% earnings growth for Indian banks in Q2FY27, though FCNR deposits may temporarily pressure margins.
The Indian banking sector is poised for a steady performance in the second quarter of the 2027 fiscal year, with earnings expected to climb by approximately 11 per cent compared to the previous year. According to a recent report by Kotak Institutional Equities, while the overall outlook remains positive, certain factors such as foreign currency non-resident (FCNR) deposits could create temporary headwinds for net interest margins (NIMs).
Private vs Public Sector Performance
The brokerage highlights a widening gap in performance between different types of banking institutions. While the broader industry is looking at an 11 per cent growth rate, the private sector is expected to lead the charge with a robust earnings growth of around 20 per cent. In contrast, public sector banks are projected to see their earnings remain largely flat during this period.
Key financial projections for the September quarter include:
- Net Interest Income (NII): Expected to grow by 11 per cent year-on-year.
- Non-Interest Income: Likely to face a decline, primarily driven by lower treasury income.
- Earnings Growth: An overall stable trend with an 11 per cent year-on-year increase.
The FCNR Deposit Factor
A significant point of focus for the upcoming quarter is the impact of FCNR deposits. Banks have been actively mobilising funds through this route, with data showing that approximately USD 127 billion had been raised under the Reserve Bank of India's swap window as of August 31, 2026.
However, this influx of liquidity presents a short-term challenge. Because a portion of these funds has not yet been deployed into loans, they are currently earning lower returns through short-term placements and investments. Kotak warns that banks holding large volumes of FCNR deposits could witness a decline in their NIMs by 10 to 20 basis points during the second quarter.
A Transitory Drag
Despite the immediate pressure on margins, the brokerage maintains that this impact is largely transitory. The benefits of lower funding costs are expected to manifest more clearly in the second half of FY27. As banks deploy this liquidity to replace expensive wholesale funding and ramp up lending, the cost-of-funds advantage should strengthen.
"The cost-of-funds benefit should build over 2HFY27 as maturing wholesale funding is not rolled over and the liquidity moves into loans. That makes the current drag largely transitory," the report noted.
Asset Quality and Credit Outlook
On the credit front, the banking system shows signs of resilience. As of mid-September, deposit growth stood at 17 per cent year-on-year, while loan growth remained strong at 19 per cent. There are currently no major indicators of deteriorating asset quality across the sector.
Furthermore, segments that previously faced stress, such as microfinance and unsecured loans, are showing signs of recovery. The brokerage anticipates that credit costs will decline across the board as fresh loan slippages moderate and recovery processes improve. As competition for deposits and loans moderates, margins—particularly for private sector banks—are expected to stabilise.