New Delhi [India], July 3 (ANI): The net interest margins (NIMs) of banks in the country are expected to come under pressure in the first half of the financial year 2025-26 (H1FY26), according to a recent report by Motilal Oswal.
However, the report projects that the trend may improve in the second half of the year.
The report stated that the decline in NIMs during the first half will be driven by a reduction in benchmark interest rates, which is likely to lead to a compression in lending yields across banks.
It stated, “NIMs to decline sharply during 1H; expect trends to improve from 2H onward: With a reduction in benchmark rates, we estimate lending yields to compress across banks”.
On the other hand, the funding costs for banks tend to adjust with a lag, even though most banks have already reduced savings account (SA) and term deposit (TD) rates. Due to this mismatch, NIMs are expected to stay under pressure in H1FY26.
There will be variations in the impact across different banks, depending on how much of their loan book is linked to the repo rate and the speed of rate transmission.
As a result, the report expects a double-digit decline in NIMs in the first quarter of FY26 (1QFY26E).
However, the report also pointed to some positive developments in the second half of the year. A phased reduction in deposit rates and a 100 basis points cut in the Cash Reserve Ratio (CRR), effective from September 2025, are expected to improve liquidity in the banking system.
These steps are likely to provide some relief to banks’ margins in the latter part of the year.
In terms of financial performance, the report estimated that Net Interest Income (NII) for the banks under coverage will see muted growth of 1.7 per cent year-on-year (YoY), while declining 0.6 per cent quarter-on-quarter (QoQ).
Pre-Provision Operating Profit (PPoP) is expected to decline 2.4 per cent QoQ, but increase 3.3 per cent YoY.
Private sector banks are estimated to witness a 2.5 per cent YoY decline in Profit After Tax (PAT), with a 2.8 per cent rise on a quarterly basis. Meanwhile, public sector banks are projected to see PAT grow by 4.8 per cent YoY but fall 11.7 per cent QoQ.
Overall, the report outlined that PAT to remain broadly flat YoY with a decline of 4.5 per cent QoQ. Looking ahead, it projects an 11.1 per cent compound annual growth rate (CAGR) in earnings for the banking sector over FY25 to FY27. (ANI)
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