Indian Banks Expected To Report Stable Q1 FY27 Earnings Despite NIM Pressure: Kotak

New Delhi, Jul 7 (KNN) Indian banks are expected to report a steady performance in the first quarter of FY27, with earnings remaining broadly stable as pressure on net interest margins (NIMs) and weaker non-interest income continue to weigh on profitability, according to a report by Kotak Institutional Equities.

Operating Environment Shows Improvement

The brokerage said the operating environment for banks has improved compared with the previous quarter, reported ANI.

Retail credit quality remains resilient, corporate balance sheets are conservatively leveraged, and government-backed schemes such as the Emergency Credit Line Guarantee Scheme (ECLGS) and the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) continue to support lending to micro, small and medium enterprises (MSMEs).

However, Kotak noted that despite healthy headline credit growth, underlying demand remains subdued. 

It cautioned that the pace of recovery in retail borrowing has been slower than expected, with some recent demand appearing temporary and potentially reversible.

Deposit Growth to Ease Funding Pressures

The report expects strong mobilisation of Foreign Currency Non-Resident (FCNR) deposits to ease funding pressures across the banking system and reduce deposit costs, with private sector banks likely to benefit more due to their stronger deposit franchise.

While pressure on NIMs is expected to moderate as competition for deposits eases, public sector banks are increasingly relying on higher-cost term deposits, which could continue to weigh on funding costs.

Stable Earnings Outlook Despite Margin Pressure

For the first quarter of FY27, Kotak expects net interest income (NII) to grow 9 percent year-on-year, while non-interest income is projected to decline by 20 percent.

Private sector banks are forecast to record earnings growth of around 11 percent, whereas public sector banks could see profits decline by 15 percent.

The brokerage said any downside surprise during the quarter is likely to stem from further contraction in net interest margins, adding that investment opportunities driven by improvements in asset quality remain limited at this stage.

(KNN Bureau)