Banks will see a sequential decline in net interest margin (NIM), a key profitability ratio as the impact of RBI’s 100 basis points repo rate cut between February 2025 to June 2025 will result in reduction in the yield on loans: Reports
MUMBAI: While traditionally the first quarter of a financial year is a weak quarter on the growth front for banks, this time would be more challenging because of the interest rate cut cycle. Banks are expected to report weak earnings for the first quarter of FY 26 due to pressure on margins, weak fee income and rising credit costs. However, the decline in profitability could be offset by higher treasury gains, said analysts.
Asutosh Mishra, head of research, institutional equity at Ashika Stock broking said, "Challenge is that the repo rate has been cut and the transmission has taken place on the loan side but is still lagging on the deposit side which will result in margin pressure. Loan growth is not very good while other income too is weak. Credit costs may remain steady. On the positive side, the first quarter is usually great because of recognition of agricultural related NPAs. The commentary for the second quarter onwards is expected to be very good for the banks."
Banks will see a sequential decline in net interest margin (NIM), a key profitability ratio as the impact of RBI’s 100 basis points repo rate cut between February 2025 to June 2025 will result in reduction
in the yield on loans. The banks would benefit from the first phase of savings account and fixed deposit rate cut (effective from April 2025) while the benefit of second phase of savings account rate cut (effective from June’25) would be contained and will be reflective in 2QFY26. The average Weighted Average Domestic Term Deposit Rate (WADTDR) for private sector banks for the two months of Q1FY26 rose 5 bps, to 7.20 per cent, compared with the average for 4QFY25. The
corresponding Weighted Average Lending Rate (WALR) was down by -12 basis points to 10.64 per cent, implying that Loan Spread declined -16 bps. For nationalised banks the WADTDR fell around -2 bps to 7.14 per cent and the WALR declined around -11 bps QoQ to 9.01 per cent which
implies that Spread declined -9 bps. It may be noted that the WADTDR and WALR for 2M1QFY26 excludes June month. We see NIM for banks to be lower (8-15 bps) sequentially.
According to AnandRathi Research report, "We expect margin to correct due to 50bps repo cut, likely offset by robust treasury gains. We expect higher slippages in agri and retail during the quarter
translating to marginally higher credit costs sequentially. Our top picks are ICICI Bank, Karur Vysya Bank and SBI."
Fresh slippages in 1QFY26 would remain elevated for banks with high exposure to unsecured retail and microfinance viz IDFC Bank, RBL and IndusInd Bank but may be flattish compared with already elevated levels seen in 4QFY25. In general, slippages have been moderately on the rise sequentially earlier for the system but 1QFY26 may be flattish, adjusted for agri non-performing loans, said Yes Securities. Motilal Oswal Financial Services expects net profitability for private banks to fall 2.5 per cent year on year. On the other hand nationalised banks could see net profits moderate 4.8 per cent year on year, it said.
