The profitability of banks is anticipated to see a year-on-year improvement in the March quarter of FY26. This positive outlook is supported by sustained growth in advances, higher fee income, and lower credit costs, as per a report by Systematix Institutional Equities. Despite ongoing margin pressures, banks are projected to deliver a stronger earnings performance in the fourth quarter.
The rise in profitability is attributed to a steady expansion in loan books, an increase in fee-based income, and a decrease in credit costs as asset quality stabilizes. Systematix highlights that the momentum in advances observed at the end of the December quarter has continued into Q4 FY26. The banking system as a whole has maintained healthy credit growth, driven by robust demand in retail, services, and industry segments.
The sustained growth in lending is expected to be a key driver of earnings, according to the report. Additionally, an uptick in fee income is anticipated due to higher business volumes. However, treasury gains might face pressure from rising bond yields during the quarter, potentially offsetting gains from core operations.
Margins are forecasted to remain relatively stable, with net interest margins (NIMs) expected to be marginally lower or flat sequentially. This is due to the continued decline in yield on advances following earlier rate cuts. The impact of lower term deposit rates is expected to partially counterbalance this pressure. Stress in unsecured loan segments has shown signs of moderation on the asset quality front and is likely to be under control in the March quarter. Slippages are expected to be contained for most banks, supported by stable recoveries and upgrades, which should help in keeping credit costs in check and supporting overall profitability.
