Narrowing margins to shrink banks' Q2 profits

MUMBAI: are expected to report weaker earnings for the second quarter of FY26 in coming weeks as falling lending rates outpaced the decline in , compressing and profit growth. Analysts said the full impact of earlier RBI repo rate cuts was felt during the quarter, causing Net Interest Margins (NIMs) to contract while deposit costs remained sticky.

Brokerages estimate a NIM contraction of 4-18 basis points QoQ, with CLSA projecting a 10 bps decline for most banks, likely marking the bottom unless the RBI cuts rates again in Dec 2025. Loan yields fell faster than funding costs because most of bank loans are linked to the repo rate and get reset in the same quarter as the repo rate cut, while term and savings deposit rates adjust with a lag.

Larger private lenders, including HDFC Bank and ICICI Bank, cut savings account rates sharply, narrowing their spread with public sector banks, though mid-sized lenders still offer higher rates. Average outstanding spreads in July-Aug contracted by 6 bps for public banks and 14 bps for private banks from the previous quarter, while the weighted average cost of certificate of deposit issuances fell 11-94 bps due to improved liquidity.

Lower margins, coupled with subdued trading income and higher operating costs, weighed on profitability. IIFL estimates core pre-provision operating profit fell 3% year-on-year, with negative operating leverage for most banks except HDFC Bank. It expects aggregate net profit to decline 11% YoY, with quarterly declines of 70% for IndusInd Bank, 20% for SBI, 11% for ICICI Bank, 6% for HDFC Bank, and 12% for Bank of Baroda. CLSA projects a similar trend, with modest gains only for Kotak Bank, Axis Bank and RBL Bank.