Indian banks are set for another quarter of steady earnings expansion, with Kotak estimating second-quarter FY27 profits will rise about 11% year-on-year, supported by resilient credit demand and broadly stable asset quality. The brokerage expects the private sector to continue leading the pack, while public sector banks are likely to deliver a more measured performance amid a still-competitive deposit environment and uneven margin trends.
Earnings Growth Holds
Kotak's outlook suggests the banking sector is entering FY27 with earnings momentum intact, even as the benefits of earlier balance-sheet repair and stronger loan growth begin to normalise. The projected 11% rise in aggregate earnings reflects a sector that has largely moved beyond the stress cycle of prior years and is now being driven by operating leverage, controlled credit costs and continued expansion in core lending activity.
The report indicates that private banks should outperform state-owned lenders in the quarter, a pattern that has persisted through much of the current cycle. Private sector banks have generally been better positioned to defend margins, manage deposit pricing and sustain fee income, while public sector banks remain more exposed to the lag effects of deposit repricing and a less flexible liability franchise. That divergence is likely to remain visible in quarterly results, even if the overall sector continues to post healthy growth.
FCNR Inflows Lift Deposits
A key feature of the quarter is the expected strength in deposit growth, aided by sizeable FCNR inflows. Foreign currency non-resident deposits have historically served as a useful source of funding for Indian banks during periods of global rate volatility or relative attractiveness in domestic yields. In the current context, those inflows are helping banks shore up liabilities at a time when deposit mobilisation remains a central strategic priority.
However, the same inflows that support balance-sheet growth may also weigh on profitability in the near term. Kotak flagged that FCNR deposits could temporarily pressure net interest margins, as banks absorb the cost of these liabilities before fully deploying the funds into higher-yielding assets. For lenders already navigating a competitive funding market, that can create a short-term trade-off between growth and margin preservation.
The margin effect is likely to be uneven across institutions. Banks with stronger current account and savings account franchises, more diversified funding profiles and better pricing discipline may be able to cushion the impact more effectively. Those relying more heavily on wholesale or term deposits could see a sharper squeeze, especially if loan yields do not reprice quickly enough to offset the cost of fresh liabilities.
Asset Quality Stays Stable
Despite the pressure on margins, the broader credit backdrop remains constructive. Kotak said asset quality appears stable, with no major signs of deterioration visible in the sector. That assessment is important because it suggests earnings growth is not being driven by a temporary release of stress provisions or a cyclical drop in credit costs, but by more durable operating trends.
Stable asset quality also implies that banks are not facing a broad-based rise in slippages or a meaningful build-up in fresh stress across retail, corporate or small-business portfolios. While pockets of weakness can still emerge in any large lending system, the absence of a clear deterioration signal is likely to support investor confidence in the sector's near-term earnings trajectory.
For the market, the key question is whether margin pressure from deposit competition and FCNR-related funding can be absorbed without disrupting return ratios. If credit growth remains healthy and asset quality stays contained, banks may still deliver respectable profitability even in a slightly tighter margin environment. But the next few quarters will be closely watched for signs that funding costs are beginning to outpace loan yield gains.
Overall, Kotak's assessment points to a sector that remains fundamentally sound, with earnings growth still in double digits and credit costs under control. The near-term challenge is not stress, but efficiency: how well banks manage the cost of growth in a market where deposits are valuable, margins are sensitive and investors are increasingly focused on sustainability rather than just headline expansion.