Q4 FY26 preview: Banks set for steady quarter, but deposit stress and margin pressures emerge

Banks are likely to report a steady set of numbers for the March quarter, supported by healthy credit growth and stable asset quality, but underlying pressures around deposits and margins are beginning to surface, according to multiple brokerage previews.

System-wide credit growth remained robust at around 13.5–14% year-on-year, driven by retail demand and improving corporate activity. Motilal Oswal Financial Services (MOSL) noted that “credit growth improves to 13.8% YoY… momentum remains robust, supported by liquidity buffers and consumption-led recovery”

However, the strength in loan growth is not being matched by deposits, which continues to be a key concern across reports.

MOSL highlighted that “deposit growth stood stable at 10.8% YoY… competition for deposits remains intense,” pushing the system-wide credit-deposit ratio to 83%, a multi-year high.

While some improvement in deposit mobilisation is visible, the quality remains a concern. Nuvama Institutional Equities said deposit growth has been “led by wholesale funding, which may limit cost of funds benefits in Q4FY26”

Margins to remain under pressure

Net interest margins (NIMs) are expected to remain largely range-bound, though with divergence across segments.

MOSL expects “NIMs to remain range-bound… funding costs remain elevated,” with large private banks likely to report flat margins, while some lenders could see a decline

Systematix Research echoed a similar view, indicating that margins could be “stable to slightly lower” on a sequential basis, as lending rate transmission catches up with earlier policy moves.

Nuvama added that “NIM [is] steady for private banks, declining for PSUs,” highlighting a clear divergence within the sector

Mid-sized banks, however, are seen as relatively better placed, with multiple reports flagging potential margin expansion for select lenders.

Asset quality stable, but risks emerging

Asset quality trends remain broadly stable, with credit costs expected to stay under control in the quarter.

However, analysts are flagging early signs of stress in specific segments. MOSL cautioned that “the ongoing war has introduced cash flow and input cost-related risk for MSMEs,” while lenders are becoming more cautious in extending credit to the segment

Systematix and Nuvama also highlighted MSMEs as a key watch area, even as overall asset quality remains benign.

Profit growth steady, but momentum moderates

Profit growth is expected to remain positive but moderate, with MOSL estimating around 7% YoY growth in PAT for its coverage universe

Private banks are likely to continue outperforming, while PSU banks may see relatively weaker earnings growth.

Another drag on profitability could come from treasury operations, as rising bond yields weigh on mark-to-market gains. Analysts expect treasury performance to be muted in the quarter, limiting upside to earnings.

Steady on the surface, pressure underneath

While headline numbers are expected to remain stable, the underlying picture suggests growing structural pressures.

Strong credit growth continues to support earnings visibility, but deposit mobilisation, elevated funding costs and emerging risks in segments such as MSMEs point to a more challenging operating environment ahead.