NEW DELHI– Indian banks are expected to report broadly stable net interest margins in the third quarter of FY26, while overall profitability is likely to improve on a year-on-year basis, according to a report released on Monday.
The report by Systematix Institutional Equities said profit growth will be supported by sustained sequential expansion in loan advances, higher fee income, and lower credit costs. It added that momentum in advances is expected to continue, driven by lower interest rates, benefits from GST rate reductions, and higher income tax limits.
The brokerage noted that while net interest margins could see some pressure in the fourth quarter, they are likely to improve thereafter as deposit costs ease with the repricing of the existing book and normalization of slippages in the unsecured loan segment, leading to lower credit costs.
Although yields on advances continue to trend lower, the report said the positive impact of earlier reductions in term deposit rates is expected to start reflecting from this quarter onward. It added that benefits from reductions in the cash reserve ratio should also help banks maintain steady margins.
According to Reserve Bank of India data, banking system advances grew 4.5 percent quarter-on-quarter and 11.7 percent year-on-year as of December 12, 2025.
Fee income is expected to rise alongside stronger loan growth, while trading gains may moderate as benchmark 10-year government bond yields move higher, the report said.
Most banks had cut rates on both savings accounts and term deposits earlier in the interest rate cycle to protect margins. While savings account rate cuts had an immediate impact on funding costs, the benefits from term deposit rate reductions — due to the lagged repricing of fixed-rate deposits — are expected to become more visible from the current quarter.
Another recent assessment cited in the report said asset quality is likely to remain stable for most lenders, apart from some seasonal increase in agricultural loan slippages. The quarter is expected to be marked by steady recovery trends, which should help cushion the impact of credit costs.
Banking stocks have remained strong, with the Bank Nifty index touching a fresh all-time high of 60,152.35 on January 2, supported by continued strength across the sector. (Source: IANS)
