Q4 earnings preview: Banks likely to report subdued profit growth in March quarter

Cumulatively, private sector banks are forecast to underperform their state-run counterparts in terms of profit growth in Q4FY25. Private lenders are expected to report a 3-4% year-on-year decline in net profit while public sector banks (PSBs) are likely to post annual net profit growth of 4-5% in Q4, analysts at multiple brokerages noted.

Analysts attribute the weaker earnings performance to a slowdown in credit growth, particularly in secured lending products and continued stress in the unsecured lending space. The microfinance lending segment, which was under pressure throughout FY25, is expected to remain a key concern, especially for mid-sized banks.

With repo rate cuts expected, banks’ net interest margins (NIMs) are likely to remain under pressure. Analysts note that borrowing costs will stay high in FY26, while mobilising deposits at higher levels will be challenging for most banks.

Meanwhile, the asset quality of public sector banks is expected to improve in the fourth quarter despite a surge in special mention accounts (SMA) during the previous quarter. Analysts believe this recovery will not lead to slippages, keeping credit costs under control. Additionally, new norms for the sale of government-guaranteed security receipts (SRs) could free up excess provisions for PSU banks, allowing them to deploy funds more efficiently.

Consistent with trends observed in the first nine months of FY25, asset quality stress is expected to persist for microfinance-focused lenders, particularly mid-sized banks. Analysts highlight that banks like IndusInd Bank, RBL Bank, Bandhan Bank, IDFC First Bank, AU Small Finance Bank and Equitas Small Finance Bank are likely to experience heightened asset quality pressure, while larger private and PSU banks are better positioned to manage the current credit cycle.

The stress in the MFI loan book is evident from the fact that IndusInd Bank, one of the largest lenders to small borrowers, had reported in the second quarter of FY25 that its gross non-performing assets ratio in the microfinance segment jumped to 6.54% from 5.16% in the previous quarter.

In the third quarter as well, the bank’s provisions for bad loans rose to ₹1,744 crore from ₹969 crore in the same period last year.

Analysts added that asset quality is deteriorating in small-ticket home, personal, two-wheeler, MSME and micro finance loans. The rate of retail NPA generation should slow down, but ageing-related provisions will play out.