Falling asset quality, rising provisions and continuing pressure on net interest margins took a toll on the net private sector banks in the first quarter of FY26. This was largely in line with analyst expectations.
Overall, the net profit of 15 private sector banks fell 3.3% year-on year. This data includes the top five– HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank – who have announced their Q1 numbers till now.
Muted growth in NII and NIMs
Among the Nifty-50 banks, ICICI Bank saw highest year-on-year growth in net profit, rising 15.5% on year to Rs 12,768.2 crore. This was followed by HDFC Bank which reported a net profit of Rs 18,155 crores, up 12.2% on year. IndusInd Bank saw a net profit of Rs 684 crores after reporting a loss of over Rs 2,000 crore in the previous quarter. Axis Bank saw a fall of nearly 4% in its net profit in the reporting quarter. YES Bank posted its best quarterly profit since restructuring. Kotak Mahindra Bank saw its net profit fall 7% for the same time period.
The net interest income too was muted for most banks. Among the larger banks, ICICI Bank and Kotak Bank were the two banks reporting a net interest income growth of more than 5% on year. HDFC Bank’s net interest income was up 5.4% on year to Rs 31,440 crore and IndusInd Bank saw a fall of 14% on year.
As per the data, the net interest income was up 3.07% on year. Banks heavily relied on growth from other income this quarter – similar to past few quarters.
Apart from IndusInd Bank, the rest saw a moderation in the net interest margins. Most of the banks cited the RBI’s repo rate cuts as the reason for the fall.
Going forward, management of banks have said in the post-earnings calls that they expect the margins to fall further in the next quarter and pick up from the second half of the current financial year. On a sequential basis, ICICI Bank saw a moderation in NIMs of 7 bps, HDFC Bank of 11 bps, Axis Bank of 17 bps, and Kotak Mahindra Bank of 32 bps.
Loan growth sluggish
Loan growth was muted as banks were cautious on lending towards the unsecured and the microfinance segments. HDFC Bank, the largest private sector bank reported a muted loan growth of 6.75% on year. This was mainly because the bank aims to bring down its credit-deposit ratio (CD ratio) to its pre-merger levels of 85-90% in the near term.
Banks also saw lower demand for credit from the corporate segment and expected a pickup from 2HFY26.
“In Q2FY26, growth is expected across rural markets, the agriculture sector, and select MSME segments, despite pricing pressure. Urban retail demand is expected to grow with the onset of the festive season in Q2 and Q3 of FY26. The full impact of the June 2025 repo rate cut of 50 bps is anticipated to flow through in Q2FY26, along with ongoing deposit repricing,” CareEdge Ratings said in a report.
It also said that in the second half of FY26, improved liquidity conditions are expected to boost lending activity. “Unless there’s a policy change, any benefit from a CRR cut is likely to occur from Q3FY26,” it added.
Deposit mobilisation continues to be a challenge for banks, especially raising current account and savings account deposits. Most banks, including HDFC Bank and ICICI Bank have cut their savings account rates in order to garner deposits.
Soumitra Sen, Head of Consumer Banking and Marketing at IndusInd Bank said, “There is further scope to cut both savings account as well as term deposit rates.” “Improving the granularity of deposits along with reduction in cost of deposits continues to be our immediate priority,” he said in the post earnings analyst call.
In terms of the asset quality ratios, ICICI Bank and YES Bank’s gross NPA ratio remained unchanged on a sequential basis at 1.67% and 1.60% respectively. IndusInd Bank saw a jump of 51 basis points on quarter to 3.64% as on June 30.
The gross NPA ratios improved for IDBI Bank, Karur Vysya Bank, South Indian Bank and Tamilnad Mercantile Bank.
The large and mid-sized private sector banks saw stress in the small ticket unsecured book and the microfinance segments, which were the main reason behind the rising slippages, eventually leading to higher provisions.
