In the first quarter of FY26, banks within JM Financial’s coverage experienced weaker performances, with profit after tax (PAT) declining by 2% year-on-year.
Loan growth further slowed to approximately 10%, compared to 11% in the previous quarter. Public sector banks (PSBs) surpassed private counterparts in loan growth, bolstered by housing and SME lending. This trend highlights the robust support these sectors receive, contributing to the overall stability of the financial system.
Deposit growth remained robust at 12.1% year-on-year, with private banks growing at 12.4% compared to 11.6% for PSBs. Notably, HDFC Bank, Kotak Mahindra, and Bandhan Bank showed significant growth in deposit mobilisation. Despite this, the credit-deposit ratio saw a slight decrease to 82.5%. This indicates a cautious approach by banks in lending, ensuring that deposit growth outpaces credit expansion, thereby maintaining liquidity.
The core operating performance of banks weakened as net interest income (NII) growth moderated to just 2% year-on-year. This was a result of net interest margin (NIM) compression, with small finance banks witnessing a significant decline. Treasury gains, however, managed to support profitability amidst these challenges. The reliance on treasury gains underscores the importance of diversified income streams for banks, especially during periods of operational stress.
Asset quality displayed mild stress, with slippages rising to 1.5% from 1.2% in the previous quarter. Credit costs increased significantly, noted especially in banks like Axis Bank, Federal Bank, and DCB. Meanwhile, HDFC Bank faced elevated costs due to additional provisioning. These trends suggest a cautious stance by banks in managing asset quality, ensuring adequate provisions to mitigate potential risks.
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Amid these challenges, JM Financial continues to favour large private banks due to their stronger return profiles and lower asset quality risks. The pecking order remains unchanged, with ICICI Bank leading, followed by HDFC Bank, State Bank of India (SBI), Axis Bank, and City Union Bank. This preference highlights the strategic advantage these banks hold in terms of scale and risk management.
JM Financial anticipates a recovery in the second half of FY26, driven by a revival in loan growth and easing credit costs. However, they have not factored in potential rate cuts, which could delay profitability growth. This cautious outlook reflects the uncertainty in the macroeconomic environment, requiring banks to remain agile in their strategic planning.
Despite the current challenges, including growth moderation and asset quality deterioration, treasury gains have helped cushion banks’ profitability. The return on assets (RoA) and return on equity (RoE) for the sector saw a slight decline, yet expectations for improvement remain. This resilience in profitability, despite operational challenges, underscores the sector’s ability to adapt and navigate through economic cycles.
In terms of future projections, JM Financial expects the loan growth to pick up in line with sector trends. This optimism is tempered by the need for potential rate cuts, which could lead to further earnings per share (EPS) adjustments and delayed PAT growth for banks. Such projections highlight the delicate balance banks must maintain between growth aspirations and risk management.