Will Public Sector Banks Show Stronger Earnings Resilience in Q1?
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Synopsis
Could public sector banks defy the odds this quarter? As they gear up for Q1 FY26, new insights suggest they might just outperform their private counterparts. With expectations of better earnings resilience, supported by improved treasury gains, the stage is set for an exciting financial landscape.
Key Takeaways
- Public sector banks show stronger earnings resilience in Q1 FY26.
- Private sector banks face challenges with sluggish credit growth.
- Higher treasury gains support PSB profitability.
- RBI's monetary easing could benefit bank margins in H2.
- Stable corporate asset quality is anticipated for PSBs.
Mumbai, July 10 (NationPress) Public sector banks (PSBs) are anticipated to exhibit greater earnings resilience in Q1 FY26, bolstered by less severe margin compression and enhanced treasury gains, as reported on Thursday.
According to Emkay Global Financial Services, the private sector banks (PVBs) are predicted to experience a subdued Q1 earnings season, primarily due to sluggish credit growth and a significant margin contraction following aggressive repo rate reductions.
In contrast, PSBs are expected to showcase stronger earnings resilience, the report elucidated.
“While several private banks are likely to report lackluster profitability — with Axis Bank and IndusInd Bank suffering from weak margins and heightened credit costs — Emkay recognizes ICICI Bank, Indian Bank, SBI, and KVB as positive outliers,” the report noted.
Additionally, SBI Cards is projected to report margin growth due to annual percentage rate (APR) increases and reduced funding costs.
“Corporate asset quality remains stable, hence we do not anticipate considerable NPA formation for PSBs,” the report stated.
Over the last three months, Bank Nifty has largely reflected broader market performance, underpinned by expectations of enhanced credit growth propelled by monetary and regulatory easing, a peak in unsecured loan stress, and appealing relative valuations.
Credit card growth (CIF) decelerated to 9% YoY, mainly due to a drop in new card issuances amidst rising asset quality concerns, especially in the sub-Rs 50,000 segment.
Nonetheless, spending growth slightly accelerated to 15% YoY in May 2025, supported by seasonal tailwinds.
The newly appointed RBI Governor Sanjay Malhotra has taken a bold approach towards monetary easing, slashing the repo rate by 100 bps to 5.5% and announcing an additional 100 bps reduction in the CRR to a historic low of 3%, effective from September to November, to stimulate growth.
Despite these initiatives, Emkay believes that a substantial credit growth recovery will take time. Meanwhile, bank margins are expected to face significant compression in H1, driven by the effect of lower repo rates on floating-rate loans. This will be somewhat mitigated by banks lowering savings account rates.
The advantages of the CRR cut — and the resulting liquidity infusion — are projected to become more apparent in H2, providing some relief to margins.
Point of View
It appears that public sector banks are positioning themselves favorably amidst a challenging economic landscape. While private sector counterparts grapple with tighter margins and credit growth, PSBs may find themselves on a more stable trajectory, potentially benefiting investors and consumers alike.
NationPress
01/09/2025
Frequently Asked Questions
What are public sector banks?
Public sector banks are financial institutions where the majority stake is owned by the government. They play a crucial role in the banking sector and the economy.
Why are PSBs expected to perform better than PVBs in Q1 FY26?
PSBs are expected to demonstrate stronger earnings resilience due to milder margin compression and higher treasury gains compared to private sector banks.
What factors are affecting credit growth?
Sluggish credit growth is influenced by aggressive repo rate cuts and rising asset quality concerns, particularly among private sector banks.
How does the RBI's monetary policy impact banks?
The RBI's monetary policy, including repo rate cuts, directly influences banks' lending rates and profitability, affecting their margins and growth.
What is the significance of the CRR cut?
The CRR cut increases liquidity in the banking system, allowing banks to lend more and support economic growth.
