Q1 Banking Preview: Strong credit, stable asset quality drive positive outlook

Indian state-run and private sector lenders are expected to report a stable set of earnings in the upcoming earnings season starting later this month on the back of robust credit growth and improving asset quality, analysts noted.

Bank credit to industry recorded a robust annual growth of 17.5% in May as advances to large industries grew at an accelerated pace, along with sustained healthy expansion in the MSE sector, Reserve Bank data released earlier this week showed.

On a year-on-year (y-o-y) basis, non-food bank credit grew by 17.4% as of the fortnight ended May 31, 2026, compared to 8.8% during the corresponding period of the previous year, according to sectoral deployment of bank credit for May 2026.

Also, the credit to agriculture and allied activities registered a y-o-y growth of 14.9% vis-à-vis 7.5% in the corresponding fortnight of the previous year.

Meanwhile, asset quality of banks also showed an improvement as gross non-performing assets, as a percentage of total advances, dropped to a multi-decade low of 1.8% at the end of financial year 2026.

The Reserve Bank's Financial Stability Report last week suggested that the Indian financial system remains resilient, underpinned by strong bank and non-bank balance sheets.

In the backdrop of these scenarios, analysts expect profitability to look better in the first quarter driven by treasury gains.

"Q1FY27 banking print will be a quarter where headline profitability looks better than the underlying operating story. Treasury gains driven by softer yields will help both PSU and private banks recoup most of the earlier mark-to-market pain, so headline PAT should surprise positively across the cohort," said Harshal Dasani, business head at INVasset portfolio management services (PMS).

Net interest margins for both private and PSU banks are likely to see a margin compression of 10–20 basis points as rate cut transmission on the loan book is running faster than deposit repricing, Dasani noted.

Meanwhile, PSU banks are likely to report stable performance driven by strong quarterly updates posted by Canara Bank.

"Canara Bank's early update showed global advances up nearly 18% year-on-year, and other PSU lenders are tracking similar trajectories, which delivers operating leverage that partially offsets margin pressure. Smaller private banks are seeing advances outpace deposits by a wide margin, which supports credit growth but keeps liability cost pressure alive," Dasani added.

Banks deposits will also get a boost after the RBI introduced a US dollar-rupee forex swap facility for fresh FCNR (B) deposits mobilised by banks for a minimum tenor of three years and a maximum of five years to attract foreign capital.

Foreign Currency Non-Resident (Bank) deposits are foreign currency term deposits maintained by non-resident Indians (NRIs).

Through this swap facility, the central bank aims to attract stable and consistent foreign inflow which could help stabilise the Indian rupee. The domestic currency has witnessed high volatility in 2026 and has depreciated by around 7% against the US dollar.