Double digit credit growth to pressurized margins; here is what to expect from banking sector Q3 earnings

The Q3 earnings season will kick off soon, with IT names like TCS, HCL Technologies,s announcing their Q3 results starting next week. Followed by IT, banking names like HDFC Bank, ICICI Bank will start reporting the Q3 numbers from January 17. The business updates for Q3FY26 from leading public and private sector banks indicate a healthy credit and deposit growth. With nearly 4 rate cuts in 2025, the credit growth outlook for banks has improved substantially, leading to a double-digit credit growth at the industry level for all banks. Here’s what to expect from Q3FY26 earnings from the banking sector

Steady net-interest income

As major public and private sector banks posted strong credit growth, the overall outlook for interest income remains steady. A judicious mix of lending portfolio towards corporate and MSME could add better yields to the interest income profile for private sector banks. However, lower interest rates could trim down excessive growth in interest earnings. Additionally, higher term deposits could increase the overall interest expenses, leading to stable net-interest income growth for banks.

Net-interest margins under pressure

The NIMs for major private and public sector banks could see some contraction of muted growth owing to higher term deposits and lower CASA exposure in the deposit profile for banks. However, banks with better lending profiles and high exposure to growth portfolios with high yields could show better resilience to NIM pressure. Banks like HDFC Bank witnessed higher term deposit growth at 12% vs single-digit growth in CASA deposits, which weighed on the investor sentiments. While private sector banks show strong double-digit credit growth, the high cost of funds could discourage earnings growth.

Asset quality improvement

Despite the operational pressures on margins, the asset quality of the overall banking sector may show improvements across the board, barring a few exceptions for key accounts in Punjab National Bank. Additionally, this would provide better cushioning for banks to create fewer provisions, aiding in better bottomline performances. A recent RBI data showed major improvement in the asset quality of overall banking sector, taking the NPA levels to a 10-year low mark. The GNPA ratio for the overall banking sector has fallen to 2.1%, the lowest level in a decade. The SMA-2 accounts, which are usually characterised as accounts that could default on the credit, have fallen to 0.8%, indicating the health of the banking system.

Small finance bank outperforming bigger bank

Post the relaxation of norms by RBI for small financial institutions, the small finance banks have leapt into providing credit to undercovered small and medium business categories. AU Small Finance Bank, Ujjivan Small Finance Bank and Bajaj Finance all reported over 20% growth in credit and deposit as well. Additionally, these banks are expected to put on a better show than large private sector banks with better margin profiles and profitability metrics. With lower concerns over asset quality, consequently leading to lower provisioning and better profitability for small finance banks.