**Muted Earnings Expected for Indian Banks in Q1 FY26**
**Meta Description:** Indian banks are projected to report subdued earnings in Q1 FY26 due to weak loan growth and lower margins, according to IIFL Capital.
**URL Slug:** indian-banks-q1-fy26-earnings-outlook
**Headline:** Indian Banks Anticipate Subdued Earnings in First Quarter of FY26
Indian banks are likely to experience lackluster earnings for the first quarter of FY26, primarily due to sluggish loan growth, reduced margins, seasonally weak fee income, and increased slippages, as highlighted in a recent report by IIFL Capital. The report forecasts a 2% year-on-year decline and a 4% quarter-on-quarter drop in profit after tax (PAT) for the banks.
The report indicates that the overall business momentum remained tepid during the quarter, with system-wide loan and deposit growth showing minimal sequential change. Year-on-year loan growth has decelerated to 9.6%, down from 11% in the previous quarter. As of June 13, loan growth was a mere 0.4%, significantly lower than the typical 1.5-2.0% growth seen in the first quarter in previous years. While loan growth has moderated across most segments, micro, small, and medium enterprises (MSME) loans have shown mid-teen growth rates. Other segments, however, have struggled, with non-banking financial company (NBFC) lending remaining flat year-on-year, large corporate loans increasing by just 1%, vehicle loans rising by 6%, and housing and unsecured loans growing by 9%.
The report also anticipates a contraction in net interest margins (NIMs) by 8-25 basis points quarter-on-quarter in Q1. This decline is attributed to a decrease in loan yields by 10-20 basis points, which outweighs the reduction in deposit rates. Since December 2024, savings account rates have been cut by 20-350 basis points, while retail term deposit rates have fallen by 20-100 basis points. Additionally, wholesale deposit rates have decreased by 1 percentage point during the quarter.
Despite average system liquidity shifting to a surplus of ₹2 trillion in Q1, compared to a deficit of ₹1.7 trillion in the previous quarter, lower loan demand and reduced deposit rates have led to a decline in average outstanding spreads—by 9 basis points for public sector banks and 26 basis points for private banks until May. The report suggests that seasonally weak fee income, coupled with persistent operating expenses, is likely to result in negative jaws for most banks, leading to stagnant core pre-provision operating profit (PPOP) growth. Furthermore, credit costs are expected to rise due to a seasonal increase in slippages and aging provisions.
Looking ahead, the report predicts that margins will continue to contract by a cumulative 22-35 basis points until the second quarter of FY26, with stabilization expected in Q3 and a potential expansion beginning in Q4.
**FAQ**
**What factors are contributing to the muted earnings of Indian banks in Q1 FY26?**
The muted earnings are primarily due to weak loan growth, lower net interest margins, seasonally soft fee income, and higher slippages impacting overall performance.
