Indian Banks' Systemic Deposit Growth Gain Momentum
The Indian banking sector is witnessing a steady pickup in deposit growth, but banks are likely to report a decline in their net interest margins (NIM) in the first quarter of FY26, according to a report by Phillip Capital.
The report noted that systemic deposit growth is gaining momentum, helping improve the credit-to-deposit ratio.
Based on business updates released so far, the overall credit growth stands at 0.4 per cent on a sequential basis.
It stated banking universe will see 1 per cent yoy (-1.5 per cent qoq) growth in NII.
Sector NIM will decline 10bps qoq /30bps yoy as cost of funds remains stable.
The report highlighted muted growth in Net Interest Income (NII) across the banking sector due to weak credit expansion.
Overall NII is projected to grow just 1 per cent year-on-year (YoY) and decline by 1.5 per cent QoQ.
Sector-wide NIM is expected to decline by 10 basis points (bps) QoQ and 30bps YoY as the cost of funds stays largely stable and returns from repo-linked loans decline.
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However, it also noted that the private sector banks have shown stronger performance with loan growth of 0.5 per cent quarter-on-quarter (QoQ) and deposit growth of 1.3 per cent QoQ. As a result, their credit-to-deposit ratio stands at 92 per cent, reflecting a decline of 0.8 per cent QoQ.
In contrast, public sector banks (PSBs) posted a modest 0.2 per cent QoQ loan growth, while their deposit levels remained flat. The credit-to-deposit ratio for PSBs remained stable sequentially at 78.
Private banks are likely to record a 1.9 per cent YoY decline and a 0.8 per cent QoQ drop in NII. Meanwhile, PSBs may witness a 0.3 per cent YoY decline and a sharper 2.4 per cent QoQ fall in NII.
On the profitability front, banks are expected to report modest growth in profit after tax (PAT), supported by lower credit costs.
Overall PAT is forecast to grow 3.5 per cent YoY and 0.8 per cent QoQ. Among segments, PSBs may post a 7 per cent YoY rise in PAT but a 4.1 per cent QoQ decline, while private banks could register 1.4 per cent YoY and 4.2 per cent QoQ growth.
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Credit costs are seen normalizing, aided by improving asset quality.
The report estimated credit cost at 59bps for Q1FY26, down from 64bps in Q4FY25 but up from 52bps in Q1FY25.
The report outlined that while the deposit momentum is positive, the pressure on margins and core earnings will be a key watchpoint for the banking sector in the upcoming quarterly results.