Indian banks are poised to deliver another strong earnings quarter, with net profit expected to rise 25.4% year-on-year in Q2FY27, according to Emkay Research, even as lending margins remain under pressure from a changing deposit mix and the unwinding of foreign currency funding support.
The brokerage said the sector is likely to benefit from healthy credit demand, which should continue to support interest income and help banks absorb a moderation in system-wide growth. At the same time, lower provisions for loan losses are expected to provide an additional lift to profitability, reflecting improving asset quality trends and a still-manageable credit cost environment.
Profit Growth Holds Firm
Emkay's outlook suggests that the banking sector's earnings momentum is not yet fading, despite signs that the broader system may be moving into a more normalized phase after a period of elevated growth. The projected 25.4% year-on-year increase in net profit indicates that Indian lenders are still benefiting from the lagged effect of strong loan expansion and disciplined balance-sheet management.
The report points to robust loan growth as a key driver of income. Even if overall system growth moderates, banks with stronger retail and corporate franchises are expected to continue expanding advances at a healthy pace. That should support net interest income and fee income, helping offset some of the pressure from funding costs.
A further tailwind comes from lower provisioning requirements. As banks see fewer fresh stress pockets and better repayment behavior across segments, they are likely to set aside less capital for potential loan losses. That improvement is particularly important because it allows more of the operating profit to flow through to the bottom line.
Margin Pressure Builds
The more immediate concern is margin compression. Emkay flagged higher foreign currency deposits as a factor that could weigh on lending margins, especially in the near term. Such deposits can alter the cost of funds and complicate the pricing environment for banks that rely on wholesale or foreign currency-linked funding.
The report also noted that FCNR-B funding is normalizing. That matters because foreign currency non-resident bank deposits had previously supported liquidity and funding conditions for the system. As that source of support fades, banks may need to rely more heavily on domestic deposits, which can be costlier in a competitive rate environment.
This shift is likely to keep net interest margins under pressure through the first part of the period before a gradual recovery in the second half. Emkay expects margins to improve only slowly, suggesting that lenders may need to balance loan growth ambitions with deposit mobilization and pricing discipline.
Second-Half Recovery Seen
The brokerage's view implies that the sector's earnings story is becoming more nuanced. Profit growth remains strong, but the quality of that growth will depend increasingly on how efficiently banks manage funding costs and protect spreads. For investors, that means headline profit numbers may remain healthy even if margin trends are uneven.
A gradual second-half recovery in margins would likely depend on a combination of factors: better deposit repricing, stabilization in foreign currency funding, and continued credit demand across retail, SME and corporate segments. If those conditions materialize, banks could see a more balanced earnings profile later in the fiscal year.
For now, the message from Emkay is that Indian banks are still on track for solid profit expansion, but the sector is entering a phase where funding dynamics matter more than before. Strong loan growth and lower provisions should keep earnings resilient, yet the normalization of FCNR-B funding and pressure from foreign currency deposits may delay a full margin rebound until the second half.