Banks likely to post double-digit Q1 profit growth despite margin pressure: Emkay

India's banking sector is expected to report another quarter of healthy earnings in the April-June period, supported by strong credit growth and resilient asset quality, even as elevated funding costs and weaker treasury income weigh on margins, according to a preview report by Emkay Global Financial Services on Thursday.

The brokerage expects banks under its coverage to post a 12.2% year-on-year increase in profit after tax (PAT) for the first quarter of FY27, reflecting the continued strength of core lending operations. However, profits are likely to decline 2.3% sequentially due to margin compression, high funding costs and softer treasury gains.

Emkay said loan demand remained robust across the banking system, with credit growth standing at 17.7% year-on-year as of mid-June 2026. The growth was driven by lending to corporates, non-banking financial companies (NBFCs), MSMEs and retail segments such as vehicle finance and gold loans.

However, deposit mobilisation continued to trail credit growth, with deposits rising 12% year-on-year. The gap pushed the banking system's loan-to-deposit ratio to nearly 83%, forcing lenders to depend more on higher-cost term deposits and wholesale borrowings, which kept funding costs elevated during the quarter.

Despite the near-term pressure, the brokerage believes funding conditions are likely to improve from the second quarter of FY27, supported by stronger Foreign Currency Non-Resident (FCNR) deposit inflows that could enhance system liquidity and ease liability pressures.

Net interest margins (NIMs) are expected to bottom out in the June quarter as banks continue to face the impact of elevated deposit rates, seasonal interest reversals linked to agricultural and Kisan Credit Card (KCC) portfolios, and a higher share of lower-yield corporate loans. Emkay expects margins to recover from the September quarter as funding costs moderate, deposit growth improves and the loan mix becomes more favourable.

The brokerage also expects overall asset quality to remain healthy despite some seasonal stress in agriculture and KCC-linked loans, with both gross and net non-performing asset ratios likely to improve further.

Among private lenders, Axis Bank, HDFC Bank, IndusInd Bank and IDFC First Bank are expected to report healthy profitability. Among public sector banks, Canara Bank and Indian Bank are likely to outperform, while State Bank of India may post a relatively modest quarter and Bank of Baroda could report comparatively weaker earnings.