Indian banks are poised to deliver another quarter of steady earnings expansion in the second quarter of FY27, with profits likely to rise 11 percent year-on-year, according to Kotak. The brokerage's outlook suggests that the sector remains on a firm footing despite a more competitive funding environment and the near-term margin pressure that often accompanies strong foreign currency deposit inflows.
Profit Growth Holds Firm
Kotak's projection points to a banking sector that continues to benefit from resilient credit demand, disciplined underwriting and a still-manageable cost of risk. The expected 11 percent rise in earnings reflects a combination of loan growth, stable asset quality and operating leverage, even as banks navigate a deposit market that has become more contested over the past several quarters.
The report indicates that private sector banks are likely to outperform public sector banks in the quarter. That divergence is consistent with a broader trend seen in recent reporting cycles, where private lenders have typically shown stronger execution on lending growth, better pricing power and more efficient balance-sheet management. Public sector banks, while improving structurally, continue to face a heavier mix of legacy assets and relatively lower margins in several cases.
For investors, the key question is not whether earnings will grow, but how durable that growth will be if funding costs remain elevated. Kotak's assessment suggests that the sector's underlying profitability remains intact, but the pace of margin expansion may moderate as banks absorb higher deposit costs and adjust their liability mix.
FCNR Inflows Lift Deposits
A notable feature of the quarter is the expected support from FCNR, or foreign currency non-resident, deposits. These inflows can be an important source of stable funding for Indian banks, particularly when domestic deposit mobilisation is under pressure. In the current environment, strong FCNR inflows are likely to have helped banks shore up deposit growth and improve liquidity coverage.
However, the same inflows may also weigh on net interest margins in the short term. FCNR deposits, while useful for funding, can be costlier or more complex to manage depending on currency movements, hedging requirements and the broader interest-rate backdrop. As a result, banks may see a temporary squeeze on spreads even as deposit growth improves.
That trade-off is central to the sector's near-term earnings profile. Faster deposit growth is positive for loan deployment and balance-sheet expansion, but if the cost of those liabilities rises faster than asset yields, margins can come under pressure. Kotak's note suggests that this dynamic is likely to be visible in Q2FY27, though not severe enough to derail overall earnings growth.
Asset Quality Stays Stable
The report does not flag any major deterioration in asset quality, which remains a critical support for the sector's earnings outlook. Stability in slippages, recoveries and credit costs would allow banks to preserve profitability even if margins soften modestly. That is particularly important at a time when loan books are still expanding and lenders are competing more aggressively for deposits.
A stable asset-quality backdrop also reduces the likelihood of large provisioning surprises, which have historically been a key source of volatility in bank earnings. With no significant stress signals emerging, the sector appears to be entering the quarter with a relatively clean credit profile.
Still, the market will watch closely for any signs that growth is being bought at the expense of pricing discipline. If banks continue to chase deposits aggressively, margin pressure could persist beyond the quarter. Conversely, if funding costs stabilise and credit demand remains healthy, the sector could sustain double-digit earnings growth into the second half of the fiscal year.
For now, Kotak's outlook presents a balanced picture: earnings growth remains intact, private banks are set to lead, FCNR inflows are supporting liquidity, and asset quality is holding steady. The main variable is margin compression, which may prove temporary but will remain a key metric for investors tracking the sector's next phase of performance.