Banking sector Q1 results review: No major surprises so far; ICICI Bank, BoB, IoB among top picks

Mint

5 days ago

Banking sector Q1 results review: The Indian banking sector's Q1 results have largely come on expected lines, with net interest margins (NIMs) staying under pressure, which is on the expected lines as rate cuts by the Reserve Bank of India (RBI) impacted banks' lending yields.
However, asset quality of major banks remained stable, with contained credit costs providing some cushion to earnings.
Most banks have experienced margin compression due to recent rate cuts, and experts believe this trend may persist for another one to two quarters, if no further rate cuts occur.
Experts believe the Indian banking sector remains structurally strong, supported by robust credit growth, healthy asset quality, and decent earnings momentum across most major banks.
Along with margin pressure, some experts note a slight uptick in credit costs and muted credit growth overall.
"There has been a slight uptick in credit costs, as the economic slowdown has begun to impact high-risk segments such as microfinance, unsecured retail, and two-wheelers, leading to some asset quality stress. As a result, overall credit growth has remained somewhat muted, though early signs of improvement are emerging due to enhanced system liquidity," said Ajit Mishra, SVP of research at Religare Broking.
Overall, the banking sector's Q1 performance has been mixed, but experts expect a stronger growth trajectory is likely over the next two to three quarters.
"In spite of macro uncertainties, banks continue to benefit from sustained loan demand, especially in the retail, MSME, and infrastructure segments," said Prashanth Tapse, Senior VP (Research), Mehta Equities.
Sneha Poddar, VP - Research, Wealth Management, Motilal Oswal Financial Services, pointed out that Indian banks posted a mixed Q1FY26, impacted by ongoing margin compression and a moderation in credit growth (nearly 9.6 per cent YoY as of June'25 versus nearly 15 per cent YoY in June 2024).
Poddar expects margin pressure to bottom out by Q3FY26, setting the stage for an earnings recovery in the second half. Moreover, deposit growth is stabilising, and loan growth, driven by retail and SME demand, may improve.
According to Vinit Bolinjkar, the head of research at Ventura, the banking sector is experiencing a 'recalibration phase', characterised by softening policy rates and a lag in deposit repricing.
Bolinjkar highlighted that large private banks demonstrated remarkable resilience, driven by a higher proportion of repo-linked loans that benefited from interest rate movements and robust non-interest income, including treasury gains and IT refunds.
Healthy provisioning buffers kept Indian banks' asset quality stable during the quarter.
However, mid-sized banks faced greater pressure on NIMs due to higher interest reversals and limited benefits from funding cost reductions, Bolinjkar observed.
"A recovery in NIMs is largely anticipated from H2FY26 onwards, as deposit repricing fully materialises and the interest rate cycle stabilises. The sector anticipates overall earnings growth to ease in FY26 before a stronger rebound in FY27, driven by a more favourable rate environment and renewed credit demand," said Bolinjkar.
Poddar prefers private banks over PSUs given their stronger loan growth outlook, better pricing power, and higher granularity in loan books.
'Among private banks, ICICI Bank delivered a strong quarter with stable NIMs, healthy loan growth, and robust RoA. HDFC Bank saw margin pressure but is expected to recover from Q3FY26 as the cost of funds normalises," said Poddar.
According to Bolinjkar, among large-scale banks, ICICI Bank emerges as a compelling choice.
"ICICI Bank's strong capital adequacy and proactive digital investments position it well for sustained long-term growth," said Bolinjkar.
"Within the mid-scale banking segment, Indian Overseas Bank (IOB) warrants attention," Bolinjkar said.
Mishra said HDFC Bank and Kotak Mahindra Bank are his top picks, as both are showing clear signs of improvement after having faced several challenges over the past few years.
"This period of time correction has brought their valuations to more reasonable levels, making them attractive once again. Both banks remain high-quality franchises with the potential to deliver mid-teen growth over the cycle. Given these factors, we maintain a positive outlook on both," said Mishra.
Tapse prefers ICICI Bank and Bank of Baroda (BoB) at this point as a long-term investment.
Tapse added that while the overall outlook for the sector remains moderately positive, with near-term margin headwinds, investors should be selective in this volatile market.
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