Indian banks' Q2FY27 earnings seen rising 11%

Indian banks are projected to see an 11% increase in earnings year-on-year for the second quarter of fiscal 2027 (2QFY27), according to a report by Kotak Institutional Equities. However, foreign currency non-resident (FCNR) deposits could momentarily impact their net interest margins (NIMs). The brokerage anticipates stable performance for the September quarter, with NII also growing by 11% year-on-year.

A decline in treasury income is expected to negatively affect non-interest income for banks. Private sector banks are anticipated to grow earnings by around 20%, while public sector banks may maintain flat earnings. The main factor influencing banks during this period will be FCNR deposits, which have been mobilized but not yet deployed as loans.

Consequently, these deposits are currently generating lower returns through investments and short-term placements. Banks holding sizable FCNR deposits may experience NIM declines of 10-20 basis points. Although the margin pressure is likely to be temporary, Kotak expects the benefits from lower funding costs to become more evident in the second half of FY27 as banks utilize the extra liquidity to replace costly wholesale funding and boost lending.