Indian banks are projected to have stable net interest margins in the third quarter of FY26, with an anticipated improvement in overall profitability compared to the previous year. Systematix Institutional Equities’ report highlighted that profitability is set to increase due to sustained growth in advances, higher fee income, and reduced credit costs. The report also forecasts a continued growth momentum in advances driven by factors such as lower interest rates, benefits from GST rate reduction, and increased tax limits.
The brokerage anticipates a temporary decline in net interest margins in Q4, followed by an improvement, as the cost of deposits is expected to decrease with the reprising of the existing book and normalization of unsecured segment slippages. Despite a decline in the yield on advances, the positive impact from prior term deposits’ rate reductions is expected to be noticeable in the upcoming quarter. Additionally, advantages from Cash Reserve Ratio reductions are likely to help maintain steady margins, as per the report.
According to RBI data, the banking system’s advances expanded by 4.5% quarter-on-quarter and 11.7% year-on-year as of December 12, 2025. The report also suggests that fee income is poised to increase alongside advances growth, while trading gains may decrease with improvements in benchmark 10-year ‘G-Sec yields’. Most banks have previously lowered rates on savings accounts and term deposits to safeguard their margins, with the benefits from term deposit rate reductions expected to become more prominent starting this quarter.
The report mentions that asset quality is expected to remain stable for most banks, except for a potential rise in seasonal agricultural slippages. It further notes that Q3 is likely to witness steady recovery trends, which should help mitigate the impact of credit costs. Recently, on January 2, Bank Nifty reached a new all-time high of 60,152.35, driven by the continued strength in the banking sector.
