Is India’s Banking Sector Poised for a Profitability Turnaround in Q3 FY26?
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Synopsis
India’s banking sector is on the verge of a significant turnaround in profitability by the third quarter of FY26, following a tough period marked by margin compression and falling loan yields. With improving asset quality and tactical flexibility among banks, a gradual yet meaningful recovery is expected.
Key Takeaways
- India’s banking sector is anticipated to recover profitability in Q3 FY26.
- Private banks have demonstrated tactical adaptability in response to market changes.
- Asset quality pressures are easing, particularly in retail and microfinance portfolios.
- Net interest margins are expected to stabilize with repo rate cuts behind them.
- A strong rebound in earnings is forecast for FY27.
New Delhi, July 17 (NationPress) Following a tough first half characterized by margin compression and declining loan yields, India's banking sector is anticipated to make a significant recovery in the third quarter of FY26 (3QFY26), according to a report released on Thursday.
Both private and public sector banks are entering a phase of transition, where the delayed benefits of deposit repricing, a boost in systemic liquidity, and improved asset quality are expected to enhance earnings, as noted by Motilal Oswal Institutional Equities in their report.
The report indicates that while the recovery will be gradual, it will be impactful, paving the way for a double-digit earnings growth in FY27.
Although loan yields may decrease alongside a drop in the weighted average lending rate (WALR), the decline will not be uniform.
While the WALR for new loans has decreased across the banking system, private banks have shown a month-on-month increase, reflecting their tactical adaptability. Conversely, public sector banks have seen a more significant decline of 30 basis points over three months, the report elaborated.
Many banks have reduced interest rates on savings accounts (SA) and term deposits (TD) by 20–100 basis points across various tenors, with greater impacts expected in the latter half of FY26.
With repo rate cuts behind them and liquidity assistance on the horizon, net interest margins (NIMs) are projected to stabilize, leading to an earnings rebound starting in the third quarter.
The report further states that asset quality challenges are diminishing—particularly in retail unsecured and microfinance institution (MFI) portfolios—allowing for potential provision write-backs.
Despite a decline in current account savings account (CASA) ratios across the board, banks with robust liability profiles are in a better position to manage margin pressures.
Moreover, the aggregate pre-provision operating profit (PPOP) for private banks is expected to surge from Rs 698 billion in 1QFY26 to Rs 831 billion in 4QFY26, driven by a comprehensive recovery in earnings, the report predicts.
In summary, the report anticipates a strong rebound for the banking sector in FY27.
'Private bank earnings growth is projected to soar to 21.7 percent in FY27 from 6.9 percent in FY26, attributed to margin recovery and reduced credit costs,' the report concluded.
Point of View
It is paramount to acknowledge the challenges faced by India's banking sector while also highlighting the potential for recovery. The insight from Motilal Oswal Institutional Equities sheds light on the resilience of private banks and their strategic adaptability, which positions them favorably in the evolving financial landscape. Upholding the nation’s economic stability remains our primary focus.
NationPress
17/07/2025
Frequently Asked Questions
What is the expected profitability trend for India's banking sector in FY26?
The banking sector is projected to experience a turnaround in profitability starting in Q3 FY26, following an initial challenging phase.
How are private and public sector banks adapting to current market conditions?
Private banks have shown tactical flexibility by increasing their lending rates, while public sector banks have faced a decline in their rates.
What factors are contributing to the recovery in bank earnings?
Key factors include deposit repricing, systemic liquidity infusion, and improvements in asset quality.
What does the future hold for private bank earnings growth?
Private bank earnings growth is expected to rise significantly to 21.7% in FY27, driven by margin recovery and lower credit costs.
How will changes in interest rates affect banks?
As banks reduce rates on savings and term deposits, the net interest margins are expected to stabilize, leading to improved earnings.
