Earnings Pressure Looms For Indian Banks In FY26, But Credit Metrics Remain Stable

Indian banks are projected to maintain steady performance across most credit metrics in the financial year 2025-26 (FY26), even as earnings may come under pressure, according to a recent Fitch Ratings report. The report highlighted strong financial results posted by Indian banks in FY25 (year ended March 2025), which have supported their standalone credit profiles and positioned the sector for future growth.

However, Fitch cautioned that banks’ earnings might face cyclical pressures in FY26 due to narrowing margins and higher credit costs. The report stated, “We believe banks can sustain steady performance across most credit metrics in FY26, except for earnings due to cyclical pressures on margins and credit costs.”

Sector Performance Amid Slower Loan Growth

Despite experiencing the slowest loan growth in four years, the banking sector showed improved asset quality, stronger capital buffers, and stable profitability. The overall sector loan growth stood at 10.6 percent in FY25, mainly impacted by reduced lending to non-bank financial institutions and unsecured retail customers amid tighter regulatory scrutiny and funding conditions.

Fitch expects these lending constraints to persist for at least another year, especially as private banks address asset quality concerns in unsecured portfolios and elevated loan-to-deposit ratios (LDRs). However, sector loan growth is forecast to rebound to 12-13 percent in FY26, supported by accommodative monetary policy and easing funding conditions.

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Deposit Mobilisation To Support LDR Stability

To sustain the nearly 120 basis points improvement in LDRs achieved in FY25, improved deposit mobilisation will be critical, particularly as deposit growth has begun to converge with or exceed lending growth. The report also noted that impaired-loan ratios and credit costs have likely bottomed out for most banks, though some banks may see further improvement through write-offs of legacy bad loans. This, combined with higher loan growth, could reduce the sector’s impaired-loan ratio by 20 basis points in FY26.

Stronger Capital Buffers Across The Sector

Capital buffers also improved, with the average common equity Tier 1 (CET1) ratio rising by 40 basis points to 14.2 percent due to internal capital generation and lower risk density. Private banks maintained a higher CET1 ratio of 16.4 percent compared to 13 percent for state-run banks. However, the gap between private and state-owned banks has narrowed recently due to improved profitability and capital issuance at state banks.

The report concluded that while banks are likely to sustain solid performance, maintaining strong core financial metrics will be crucial for enhancing resilience against future economic shocks and supporting positive momentum in their credit profiles.

(From ANI)

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