Indian banks are likely to post another quarter of steady earnings expansion in the second quarter of FY27, with aggregate profit growth estimated at 11 percent year-on-year, according to Kotak. The brokerage's outlook points to a banking sector that continues to benefit from resilient credit demand and improving deposit mobilisation, even as foreign currency non-resident, or FCNR, inflows create a near-term drag on lending spreads.
Earnings Growth Holds
Kotak's assessment suggests the sector is entering the quarter with a relatively balanced operating backdrop. Earnings growth of 11 percent would mark a healthy, if not explosive, pace for a system that has spent the past several quarters navigating tighter liquidity, competitive deposit pricing and a moderation in margin expansion. The report expects private sector banks to lead performance, reflecting their stronger operating leverage, better liability franchises and more diversified fee income streams.
Public sector banks, by contrast, are likely to lag their private peers, though not necessarily because of stress in the underlying business. Instead, the gap appears to reflect structural differences in deposit mix, pricing flexibility and the ability to protect spreads in a competitive funding environment. For investors, the key question is not whether banks are growing, but whether that growth is translating into durable profitability at a time when funding costs remain sensitive.
FCNR Inflows Lift Deposits
A notable feature of the quarter is the role of FCNR deposits in supporting system-wide deposit growth. These inflows, typically linked to non-resident Indian savings in foreign currency, can provide banks with a useful source of stable funding. In the current cycle, however, the same inflows may temporarily weigh on net interest margins because they often come at a cost that is not immediately offset by higher-yielding asset deployment.
Kotak's note implies that the benefit of stronger deposit growth may come with a trade-off. Banks can use the additional liquidity to support loan growth and reduce reliance on more expensive wholesale funding, but the short-term impact on margins may still be negative. That dynamic matters because margins have been one of the most closely watched indicators for the sector, especially after a period in which deposit repricing and funding competition squeezed profitability.
The broader implication is that banks may be prioritising balance-sheet stability over aggressive margin protection. In a period of uncertain rate transmission and uneven liquidity conditions, that approach can be prudent, but it also means earnings quality will depend heavily on execution across lending, treasury and fee-based businesses.
Asset Quality Stays Stable
On the asset quality front, Kotak sees no major signs of deterioration. That is an important signal for a sector that has spent years repairing balance sheets and tightening underwriting standards. Stable asset quality suggests that credit costs should remain contained, allowing operating profit growth to flow through to the bottom line without being offset by a sharp rise in provisions.
The absence of visible stress also indicates that loan growth has not yet come at the expense of prudence. While pockets of weakness can emerge in any large banking system, the current read-through is that the sector is not facing a broad-based deterioration in repayment behaviour. That should support investor confidence, particularly in lenders with strong retail franchises and conservative underwriting.
For the market, the combination of moderate earnings growth, margin pressure from FCNR-driven deposit inflows and stable asset quality creates a nuanced picture. It is not a story of dramatic acceleration, but rather one of resilience. Banks are still growing profits, still attracting deposits and still keeping credit costs under control. What changes from lender to lender is the degree to which each can convert those advantages into sustained return on assets and return on equity.
The Q2FY27 season will therefore be closely watched for signs of how much margin pressure is temporary and how much reflects a more persistent funding-cost cycle. Private banks are expected to remain the preferred names on relative performance grounds, but the broader sector appears positioned for another quarter of orderly, if uneven, expansion.