Banks' Q2 FY27 Earnings Rise 20% on Lower Provisions, Stronger Income Growth Support: Kotak Report

New Delhi, Nov 12 (KNN) Indian banks are expected to see further improvement in interest income growth as a favourable loan mix and lower funding costs support margins, while asset quality is likely to remain stable, according to a report by Kotak Institutional Equities.

Banks under the brokerage's coverage recorded 20 per cent year-on-year (YoY) earnings growth in the second quarter of FY27, supported by higher operating profits and lower provisions, ANI reported, citing the report.

Net interest income (NII) rose around 15 per cent YoY, while operating profit increased by a similar rate. Provisions declined 25 per cent during the quarter.

Private banks reported earnings growth of around 25 per cent, compared with nearly 20 per cent for public sector banks.

Loan Mix and Funding Costs to Support Margins

Kotak expects net interest margins (NIMs) to improve as banks shift towards a more favourable loan mix, even if headline credit growth moderates.

Banks are also replacing higher-cost wholesale borrowings with lower-cost term deposits, including foreign currency non-resident (FCNR) deposits.

The report expects lending to gradually shift away from corporate loans, where some recent demand has been driven by higher working capital requirements.

However, the extent of margin improvement will depend on the duration of the interest rate cycle and deposit funding conditions.

Asset Quality Remains Stable

Asset quality remained firm in the second quarter, with fewer fresh additions to bad loans supporting the trend. Kotak also sees limited near-term risks in gold-loan portfolios, citing banks' customer mix, which is tilted towards larger borrowers with relatively lower risk profiles.

While interest income growth remained healthy, non-interest income increased by only 2 per cent YoY.

Kotak expects a better loan mix, changing funding costs and stable asset quality to support earnings, although the pace of improvement will depend on interest rate and deposit trends.

(KNN Bureau)