Bank profits may rise 25% in Q2FY27: Report

Indian banks are projected to see a 25.4% increase in net profit year-on-year in the July-September quarter, according to a report by Emkay Research. The brokerage anticipates improved profitability due to healthy loan growth, rising income from core banking operations, and lower provisions for potential loan losses. Loan growth, flat or slightly reduced margins, and decreased credit costs will contribute to this improvement, partially offset by lower treasury gains, the report states.

The September quarter is considered a one-off period, with significant mobilization of foreign currency deposits contributing to accelerated credit and deposit growth, system-wide credit growth at 18.1% year-on-year as of September 15, and deposit growth accelerating to 17.3% from 12% in June. Initially, the additional funds will be used to retire high-cost liabilities, partially invested in other assets, and gradually deployed as loans, taking around two quarters to fully absorb the liquidity.

While net interest margins may compress by 1-32 basis points in the September quarter, they are expected to recover gradually in the second half of the financial year. Despite the near-term pressure, Emkay expects net interest income to grow 12.5% year-on-year and pre-provision operating profit to rise 17.2%. The brokerage also notes that asset quality is expected to remain stable, with easing stress in unsecured retail loans, though remains vigilant of external risks such as El Nino and drought conditions.

Overall banking system growth is expected to moderate to around 16% in FY27 as the impact of FCNR-B-related funding normalizes, with healthy organic loan growth.