After a sluggish first half, the banking sector appears to be gaining momentum. Improved loan demand is expected to boost bank earnings in Q3FY26, while NPA levels and margins remain relatively controlled.
Banking Sector: The banking sector is gradually showing signs of recovery after a weak start and a slow first half. Improving loan demand from individuals and companies is easing the pressure on banks' income. Simultaneously, the situation regarding Non-Performing Assets (NPAs) has not significantly worsened. In this environment, the third quarter of fiscal year 2025-26 could bring some relief to the banking sector. Brokerage firm Antique Stock Broking believes that clear indications of improved bank earnings are emerging in the third quarter.
A Changed Scenario After the First Half
The first half of fiscal year 2025-26 was not easy for the banking sector. Loan growth was sluggish, and margins were under pressure. However, the situation is gradually changing. Signs of improvement are visible in loan demand across both the corporate and retail segments. This is raising hopes for an increase in banks' interest income.
While some risks may persist related to agriculture and rural areas, the overall sector outlook appears to be improving.
Expectations of Improved Earnings in Q3FY26
According to Antique Stock Broking's report, the banking sector's total earnings in the third quarter of fiscal year 2025-26 are expected to grow by approximately 5.3% year-on-year. Earnings are also projected to increase by about 1% compared to the previous quarter.
The brokerage states that conditions were weak in the first half, but loan disbursement is now accelerating. This direct benefit can positively impact banks' income and be reflected in the third-quarter results.
Improvement in Private Bank Earnings
The report indicates that private bank earnings in 3QFY26 could increase by around 3% year-on-year. A growth of approximately 4% is expected on a quarter-on-quarter basis.
Improved loan mix, b balance sheets, and controlled NPAs are expected to drive performance in private banks. Larger and mid-sized private banks are particularly well-positioned to benefit from this environment.
The Situation with Public Sector Banks
A year-on-year increase of approximately 8% is estimated for public sector bank earnings. However, a one-time gain in the previous quarter could lead to a decline of around 3% in public sector bank earnings on a quarter-on-quarter basis.
Despite this, the overall position of public sector banks remains stable, and no major shocks are currently indicated.
Loan Growth Accelerates, Deposits Remain a Challenge
According to Antique Stock Broking, bank loans in the third quarter could increase to around 11.3% year-on-year. Loan growth is also expected to be approximately 3.7% compared to the previous quarter.
Conversely, deposit growth in banks is not accelerating at the same rate. The report suggests that deposit growth could be around 10% year-on-year and approximately 2.4% quarter-on-quarter.
Rapid loan growth and slower deposit growth could become a significant challenge for banks in the future, as this poses a risk of increasing funding costs.
No Major Pressure on Margins
The report also states that a significant decline in banks' Net Interest Margin (NIM) is not anticipated in the third quarter. Some banks may even see a slight improvement.
Margin improvement is expected particularly in HDFC Bank, Federal Bank, and City Union Bank. There is no expectation of any major change in the margins of public sector banks, and they are likely to remain relatively stable.
Profitability Levels to Remain Stable
Antique Stock Broking believes that there will be no major fluctuations in the overall profitability of the banking sector. Key profitability metrics are likely to remain stable. This indicates that the sector is balanced and there is no immediate risk of a major disruption.
Bond Yields Impact Treasury Income
The report also mentions that due to rising bond yields, banks' treasury income in the third quarter could be lower compared to the previous quarter.
This could affect banks' other income and is likely to put more pressure on public sector banks.
Investor Focus Areas
In the coming period, investors will focus on how quickly banks can mobilize deposits. Banks' approach to unsecured loans will also be crucial.
If deposit growth remains weak, banks' costs could increase. Taking on excessive risk in unsecured loans could negatively impact asset quality.
Antique Stock Broking's Preferred Bank Stocks
Antique Stock Broking has identified a few select stocks as its top picks in the banking sector. The brokerage's preferences in private banks include ICICI Bank, HDFC Bank, Karur Vysya Bank, and Ujjivan Small Finance Bank.
Regarding public sector banks, State Bank of India is Antique's first choice. The brokerage believes that these banks have b balance sheets and are well-positioned to perform better in the current environment.
