Banks Q2FY26 Review: Loan Growth Picks Up Pace, Deposits Slowdown
Retail loan growth outlook improved, with growth in credit cards and personal loans looking up. SME credit remains the key growth driver: Reports
MUMBAI: Banks delivered a mixed performance in the July-September of 2025-2026. With the central bank cutting the repo rate in early July 2025, banks witnessed Net Interest Margin pressures. This is because a cut in the repo rate results in banks’ lending rates to fall, however the interest rates on deposits come down with a lag. For instance, the country’s largest lender State Bank of India saw its domestic Net interest margin (NIM), a key profitability metric drop 18 basis points to 3.09 per cent for the quarter under review from 3.27 per cent in the corresponding quarter of the previous financial year.
HDFC Bank’s NIM declined to 3.3 per cent in Q2FY26, compared to 3.5 per cent in
the same period a year ago, and 3.4 per cent in the previous quarter, likewise Kotak Bank’s NIM compressed to 4.54 per cent from 4.91 per cent YoY, ICICI Bank’s remained stable at 4.30 per cent. Lower treasury gains also weighed on banks profitability as the relatively stable bond yields during the September quarter resulted in limited opportunities for trading profits, leading to subdued treasury income compared to the previous year.
Retail loan growth outlook improved, with growth in credit cards and personal loans looking up. SME credit remains the key growth driver.
With the fall in lending rates, corporate credit is slowly moving back to the system, bankers said. CS Setty chairman, SBI said that the bank has a robust pipeline of Rs 7 lakh crore, half of which is already
sanctioned, largely comprising working capital and term loans predominantly for the private sector. Deposit growth grew slower than credit growth for most banks. Most banks expect easing liquidity,
healthy sanction pipeline to drive better credit growth in 2H and earnings recovery in the second half of FY26.
Credit cost decreased for banks with pain from micro finance likely to have peaked out. While asset quality improved, banks maintained strong provisioning buffers, with one-time adjustments, such as Axis Bank’s ₹1,231 crore crop loan provision.
According to Anand Rathi report, the third quarter will see stable NIM barring a sharp rate cut. Share of unsecured loans is likely to rise gradually, which would support NIMs. “We expect credit cost to further improve in 2H. Impact of Expected Credit Loss provisions norms would be limited as per the management of the large banks.”
“We prefer banks with greater consistency, increasing lending market share and strong tech architecture. Our top picks are: ICICI Bank, SBI,” said Anand Rathi report.
