Banks Q4 preview: Earnings set to soften as loan growth slows, margin pressure rise

Mumbai: India’s banks are bracing for a softer March quarter (Q4FY25), with earnings likely to underwhelm amid slower loan and deposit growth, sticky funding costs and rising stress in unsecured lending. This comes as a reversal from the robust performance seen in previous quarters, reflecting a sector that’s now navigating a more challenging interest rate and credit quality environment.

The fourth quarter of FY25 is shaping up to be weaker for the banking sector, analysts say, marked by decelerating credit growth, margin compression, and elevated credit costs. Private banks with high exposure to unsecured and microfinance segments may post mixed earnings, while public sector lenders could turn in a relatively stable performance.

Margins under pressure, slippages inch up

In this context, banks are expected to report subdued numbers: slower loan growth, similar deposit growth, pressure on net interest margins (NIMs) from elevated funding costs, reversals in interest income for some lenders, and higher slippages in unsecured and microfinance loans. On the flip side, analysts point to a few positives—such as better recovery trends and controlled operating expenditure—as potential buffers.

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Despite the softening seen in provisional Q4 disclosures, many banks remain upbeat about future loan growth, according to Kotak Institutional Equities. “Credit growth is being driven by retail and MSME loans, while growth in credit to industry is still quite sluggish. Microfinance disbursements are expected to be lower YoY, but higher QoQ because the fourth quarter tends to be seasonally strong,” it said.

IIFL Capital expects the sector’s net profit to decline about 7% year-on-year in Q4 FY25, due to loan growth deceleration, margin contraction, lower trading gains and elevated credit costs. Sequentially, profit after tax is expected to edge up just 1%. 

It also sees operating expenditure rising only 4% YoY, thanks to restrained employee and branch expansion among large private lenders and a high base from PSU bank wage revisions. PPOP (pre-provision operating profit) is forecast to grow 4% QoQ and 9% YoY, though declines are expected for Bank of Baroda, RBL Bank and IndusInd Bank.

"While select banks have cut SA (savings account) deposit rates recently, term deposit rates remain unchanged due to the liquidity deficit. With only partial transmission of repo rate cuts to loan yields, we expect core NIMs to further contract,” IIFL said, adding that fee income should remain strong, but trading gains could disappoint despite a drop in G-Sec yields, given the new investment accounting norms.

As Mint reported on 8 April, loan growth at banks including Punjab National Bank, Bank of India, IDFC First Bank, Yes Bank, Bandhan Bank, IDBI Bank and South Indian Bank fell to 8-20% on-year, down from 12-22% in the previous quarter.

Motilal Oswal expects net interest income (NII) across the sector to rise about 4% on-year in Q4 FY25, while PPOP may dip slightly by 0.7%.

Elara Securities noted that slow loan growth, ongoing deposit constraints and continued liquidity stress would keep funding costs elevated, feeding into further NIM compression. “Transmission of RBI rate cuts will also create yield pressure,” it said.

The brokerage expects lower CASA ratios for most banks, with private banks operating in the 85–90% credit-deposit (CD) ratio range and PSUs in the 70–75% range. Liquidity coverage ratios (LCR) and credit costs will also be key indicators to watch.

Among banks, ICICI Bank, Kotak Mahindra Bank and Bank of Baroda are the top picks for the quarter, while IndusInd Bank and AU Small Finance Bank may underperform, analysts said. Commentary on NIMs and updates on unsecured and microfinance loan performance will be closely monitored.

Motilal Oswal warned that continued difficulty in garnering low-cost deposits could push up the overall cost of funds. “With inflation easing, we foresee two to three rounds of rate cuts in FY26, which will impact yields—especially in H1 FY26,” it said, though a cut in the cash reserve ratio (CRR) and marginal cost lending rate (MCLR) adjustments may offer partial relief.

Experts believe margin moderation will be driven by deposit book repricing, persistent high cost of incremental deposits, and rate cut transmission. That said, the full impact of the February rate cut is expected to play out more in Q1 FY26 than in the March quarter.

According to RBI data, overall credit growth for the banking system remains soft—hovering below 12%.

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Asset quality trends, while broadly stable for larger banks, show emerging stress pockets in unsecured segments. YES Securities said slippages will stay elevated for banks with large unsecured retail and microfinance exposures, such as IDFC First Bank, RBL Bank and IndusInd Bank. However, the sequential rise may not be significant.

“In general, slippages have been moderately on the rise sequentially for the system and a similar moderate rise may continue,” the brokerage said. 

It expects a marginal uptick in provisions for lenders including HDFC Bank, ICICI Bank, SBI, Axis Bank, Bank of Baroda and Indian Bank. Operating expenditure is also expected to lag business growth in both private and public sector banks.

Sector outlook: Nearing a trough, but risks remain

Goldman Sachs said in a report that near-term data points may remain soft, citing sluggish credit growth, margin pressure due to mismatched repricing of loans and deposits, and elevated credit costs. This could result in modest earnings-per-share (EPS) cuts of about 2% on average for FY26.

“We believe the sector could be closer to the bottom of the cycle, with cuts to consensus EPS forecasts for FY26–FY27E ending in H1 FY26,” Goldman said. It noted early signs of stabilizing asset quality, with credit bureau data reflecting steady trends across loan segments.

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Still, risks loom large. 

The brokerage flagged several threats to the sector’s outlook: steeper repo rate cuts that would hurt NIMs, high consumer leverage amid decade-low net financial savings of 5%, implementation of the BULA (Banning of Unauthorized Lending Activities) bill—which could disrupt microfinance and subprime segments—sluggish macro recovery, persistent deposit growth deceleration, and renewed competition in consumer lending in H2FY26.