Banks Brace For Another Tough Quarter Amid Margin Pressure And Credit Stress: Analysts
The banking and financial sector as a whole is heading into another challenging earnings season for the second quarter of FY26, with analysts flagging margin compression, weak loan growth, and elevated credit costs as key headwinds. Both Macquarie and BofA Global Research have released cautious previews, highlighting the impact of rate cuts, asset quality concerns, and the importance of festive demand commentary as banks prepare to report results around Diwali.
Macquarie notes that “2QFY26E is again going to be a tough quarter (after 1QFY26) marred by sharp margin compression, weak loan growth and elevated credit costs.” The brokerage expects muted earnings growth across the board, with core pre-provision operating profits likely to be even weaker.
Challenges Facing the Banking Sector
One potential bright spot could be treasury gains from the YES Bank stake sale, which Macquarie says is “the only saving grace” this quarter. However, even large banks like ICICI Bank, HDFC Bank, and Axis Bank are expected to report “very weak” loan growth.
Credit stress is also expected to persist in NBFCs, particularly in vehicle finance small-ticket SME loans, and unsecured personal loans. Macquarie add, “Floods and extended monsoon would also have had an impact on NBFCs this quarter”
PSU Banks and Asset Quality Concerns
On PSU banks, the note cautions that while major asset quality deterioration is unlikely, “we need to closely observe whether there is any SME stress and pay particular attention to management commentary surrounding SMEs, especially those affected by the US tariff issue.”
BofA Global Research echoes the cautious tone, stating that “India banks’ 2Q26 are likely to be soft on NIM normalization (most banks) and elevated credit costs (mainly mid-size private banks).” The firm now expects the bottoming out of net interest margins (NIMs) to be pushed to early FY27, especially if the RBI proceeds with “50 bp cuts” as projected.
Outlook for Large Banks
Among the large banks, BofA sees HDFC Bank and ICICI Bank as relative outperformers. “We see relatively defensive earnings and guidance from HDFC Bank and ICICI Bank. They also have the least AQ risk,” the note says, adding that “HDFC Bank and ICICI Bank are looking quite attractive from a relative valuation perspective.”
For ICICI Bank, BofA expects “moderation in loan growth but slightly better than industry level,” and notes that “AQ risk remains benign.” HDFC Bank is projected to see “controlled and stable credit cost to support profit growth,” though NIM pressure and a high base for non-interest income may weigh on results.
Investment Strategies for Indian Investors
Given the challenging environment for banks, investors should exercise caution when investing in the banking sector. It is essential to keep a close eye on the earnings reports and guidance from banks, as well as the overall economic conditions and monetary policy decisions.
Investors can consider investing in diversified portfolios that include a mix of banking and non-banking stocks to minimize risk. Additionally, investors can look into sector-specific mutual funds that focus on the banking sector, but it is crucial to evaluate the fund’s performance and strategy before investing.
For those interested in investing in individual stocks, HDFC Bank and ICICI Bank may be considered as relatively safer options due to their strong balance sheets and relatively lower AQ risks. However, it is essential to conduct thorough research and consider multiple factors before making any investment decisions.
Conclusion
In conclusion, the banking sector in India is facing another challenging quarter due to margin compression, weak loan growth, and elevated credit costs. While there are some bright spots, such as treasury gains from the YES Bank stake sale, investors should exercise caution when investing in the banking sector. By keeping a close eye on earnings reports, economic conditions, and monetary policy decisions, investors can make informed decisions and navigate the challenging environment.
