Public Sector Banks Expected to Show Stronger Earnings Resilience in Q1

Mumbai – Public sector banks (PSBs) are projected to deliver stronger earnings resilience in the first quarter of FY26, driven by relatively moderate margin compression and higher treasury gains, according to a report released Thursday by Emkay Global Financial Services.

In contrast, private sector banks (PVBs) are expected to report muted Q1 performance, primarily due to sluggish credit growth and a significant contraction in margins following aggressive repo rate cuts.

“While most private banks are likely to post subdued profitability — with Axis Bank and IndusInd Bank hit by weak margins and elevated credit costs — ICICI Bank, Indian Bank, SBI, and Karur Vysya Bank (KVB) are expected to be positive outliers,” the report said.

SBI Cards is projected to benefit from margin expansion, supported by annual percentage rate (APR) hikes and reduced funding costs.

The report also noted that corporate asset quality remains stable, and therefore, significant new non-performing asset (NPA) formation is not anticipated for PSBs.

Over the last three months, Bank Nifty has largely tracked the broader market, buoyed by expectations of improved credit growth. These expectations are rooted in a more accommodative monetary and regulatory environment, easing stress in the unsecured loan segment, and relatively attractive valuations.

Credit card growth (in terms of cards-in-force or CIF) slowed to 9% year-on-year, mainly due to fewer new card issuances amid growing asset quality concerns—particularly in the sub-?50,000 segment. However, spending growth picked up to 15% YoY in May 2025, aided by seasonal trends.

In a bold move to stimulate economic growth, newly appointed RBI Governor Sanjay Malhotra has slashed the repo rate by 100 basis points to 5.5% and announced an additional 100 bps cut in the Cash Reserve Ratio (CRR) to a historic low of 3%, effective from September to November.

Despite these aggressive measures, Emkay believes credit growth will take time to accelerate. In the meantime, bank margins are likely to compress further in H1, largely due to the impact of lower repo rates on floating-rate loans. This compression, however, may be partially mitigated by banks reducing savings account interest rates.

The liquidity boost from the CRR cut is expected to ease margin pressure more significantly in the second half of FY26, offering some relief to the banking sector.

With inputs from IANS