Q1 Earnings Preview: Despite RBI’s Rs 9.5 Tn Liquidity Push, Q1 May Be The Most Challenging In Years For Banks

Despite the RBI adding over Rs 9.5 trillion in liquidity since January and slashing the repo rate by 100 basis points, the first quarter may end up being one of the weakest for the banking sector in recent times.

Q1 FY26 is shaping up to be a soft quarter for the banking sector, marked by muted credit demand, margin compression, and elevated provisioning, especially among mid and small-sized lenders.

While the sector enjoys a sweet spot with decade-best asset quality and strong capital positions, the immediate challenge is clear: navigating the liquidity crunch and mobilizing deposits efficiently without excessive margin sacrifice. Execution on this front will be key for sustained growth.

Liquidity Abundant, Growth Elusive: Q1 FY26 Set To Be One of The Weakest For Banks

"Margins are likely to come under pressure. With deposit costs still elevated and loan yields peaking, net interest margins are expected to shrink quarter-on-quarter. Credit growth has already cooled system-wide loan growth has slowed to about 11%, down from over 15% a year ago. Deposits are growing at a similar pace, around 10-10.5% YoY," said Trivesh D, COO Tradejini.

"Even the RBI's latest Bank Lending Survey reflects this shift. Bankers' optimism on credit demand has softened, with net positive responses for Q1 FY26 dropping to 37% from 44% earlier. Personal loans continue to drive retail credit, but here too, the momentum is slowing, growth stands at 13.7%, down from 19.3% last year. Segments like vehicle loans, credit card outstanding, and other unsecured personal credit have all moderated," Trivesh D further added.

In short, demand is coming off a high base. While asset quality remains steady, a combination of softer loan growth and margin compression could weigh on bank profitability this quarter.

There's plenty of liquidity, but that alone doesn't guarantee growth. Real lending momentum needs business confidence and investment appetite to pick up.

Q1 FY26 May Be Soft, But Easing Monetary Conditions Set The Stage For H2 Revival

"Credit growth slowed sharply to 10.02% YoY, down from 19.6% last year, driven by a high base, a softer capex cycle, and cautious lending, particularly in rural markets. Deposits grew faster than advances at 10.12%, improving the credit-deposit ratio but also reflecting weak credit appetite," as per the view from Master Capital Services Limited.

"Margins are under pressure, with NIMs expected to compress by 10 bps QoQ and 30 bps YoY, although relief could come in H2 as liquidity improves with the RBI's CRR cut and further repo easing. Asset quality remains stable for large banks, with NPLs contained at 2-3%, but unsecured lenders face rising stress. PAT growth for private banks may remain flat, while PSUs could see ~6.4% YoY growth," Master Capital Services further added.

Master Capital Services further stated that they see selective strength emerging, and our top pick for the quarter is Bank of Maharashtra, well-placed with 15.4% credit growth, resilient margins, stable asset quality, and attractive valuation. As monetary conditions ease, the stage is set for a more constructive second half,

Bank Earnings Set To Disappoint In Q1 FY26 As NIMs Shrink And Credit Slows

"We expect Q1 FY 25-26 earnings to be subdued in the banking sector. Overall, we expect a 5% growth in NII and flat as compared to the previous quarter. Net Interest Margins (NIMs) will decline in comparison to the q1 of the previous year. While banks have started adjusting to lower lending rates, the effect on deposit rates is not fully transmitted leading to compressed NIMs for the banks. Private banks are likely to perform poorly in comparison to public sector counterparts. We also expect credit growth to slow down to 10% in Q1 weighed down by curtailed lending in unsecured segment," Gaurav Goel (Entrepreneur and SEBI-Registered Investment advisor).

Mr. Pranay Aggarwal, Director and CEO of Stoxkart said, "The Q1 FY25 preview for the banking sector suggests steady credit growth, with system credit expansion tracking in the low double-digits YoY. Asset quality remains resilient overall, though slippages could see mild seasonal upticks. Margins may remain under slight pressure due to rising deposit costs, especially for private sector banks."

"We expect strong traction in retail and SME lending to offset some of these headwinds. Overall, we remain constructive on the sector's fundamentals while watching for any stress pockets in unsecured retail. These trends underscore the need for disciplined risk management and diversified growth strategies going forward," he further added.

FY26 Outlook: Credit Growth Roars, Deposit Mobilization Becomes Crucial

The Indian banking sector has delivered a robust start to FY2025-26, firmly anchored by strong double-digit credit growth. This expansion, significantly outpacing deposits, reflects the underlying momentum in the economy - driven by resilient retail demand, notably in segments like autos, and encouraging signs of revival in corporate lending for working capital and select capex.

"At Star Housing Finance Limited, we are aligned with this positive growth trajectory, particularly within the housing finance segment which remains fundamentally strong. Our focus remains on maintaining our disciplined underwriting standards to preserve our excellent asset quality, while innovating in our funding strategies to support responsible growth for our customers during this dynamic period," commented Kalpesh Dave - CEO at Star Housing Finance Limited.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor GoodReturns. The author, nor the brokerage firm nor GoodReturns would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.