Indian banks are likely to report another quarter of steady profit expansion in the second quarter of FY27, with earnings expected to rise 11% year-on-year, according to a Kotak report that points to resilient credit demand, healthy deposit mobilisation and a broadly stable asset-quality backdrop.
The brokerage's outlook suggests that the sector remains on a firm footing even as funding costs and deposit mix continue to shape profitability. Private sector banks are expected to outperform public sector lenders, reflecting their stronger operating efficiency, better pricing power and more favourable liability franchises. The report also flags a near-term margin headwind from foreign currency non-resident, or FCNR, deposits, which have helped lift system deposit growth but could weigh on net interest margins in the quarter.
Private Banks Lead Growth
Kotak's assessment indicates that the earnings trajectory for Indian banks remains constructive, but the pace of improvement is likely to vary sharply across ownership groups. Private banks are seen as the main growth engine, supported by superior loan mix, stronger fee income and tighter control over operating costs. Public sector banks, while still benefiting from a healthier credit environment than in past cycles, may lag due to relatively lower margins and less flexible deposit pricing.
The expected 11% year-on-year earnings growth for the sector comes at a time when investors are closely watching whether banks can preserve profitability after a period of elevated competition for deposits. The report suggests that credit growth has remained sufficiently healthy to support revenue expansion, but the key question for the quarter is how much of that growth is absorbed by funding costs.
FCNR Inflows Lift Deposits
A notable feature of the quarter is the role of FCNR deposits in supporting system liquidity. These inflows have helped banks strengthen deposit growth at a time when liability mobilisation remains central to balance-sheet expansion. However, the same inflows may create a temporary drag on margins because FCNR deposits are typically priced in line with global currency-linked funding conditions and can be more expensive than conventional domestic deposits.
Kotak's note implies that the benefit of stronger deposit growth may not translate immediately into higher profitability. Instead, banks could see a short-lived squeeze on net interest margins as the cost of funds rises faster than asset yields adjust. That dynamic is especially relevant in a market where lenders have spent several quarters trying to rebuild deposit franchises after intense competition for retail and term deposits.
Asset Quality Stays Stable
Despite the margin pressure, the report does not point to any material deterioration in asset quality. That is an important signal for the sector, which has spent several years cleaning up balance sheets and reducing stress in legacy loan books. The absence of major warning signs suggests that credit costs should remain contained, allowing earnings growth to be driven more by core business performance than by reversals or one-off gains.
A stable asset-quality outlook also supports the view that the banking cycle remains in a relatively healthy phase. While pockets of stress can emerge in unsecured retail or microfinance segments, the broader system appears to be holding up well. For investors, that reduces the risk of a sharp earnings miss and keeps attention focused on margins, deposit costs and loan growth rather than on credit deterioration.
The report's tone is consistent with a sector that is still expanding, but at a more measured and selective pace than in the strongest parts of the post-pandemic credit cycle. Banks with stronger current account and savings account franchises, better deposit granularity and disciplined lending practices are likely to retain an edge. Those relying more heavily on wholesale funding or higher-cost term deposits may face greater pressure on spreads.
For the market, the key takeaway is that Indian banks remain positioned for moderate earnings growth rather than a broad-based acceleration. The headline profit number is healthy, but the composition matters: private lenders are expected to do the heavy lifting, FCNR inflows may temporarily dilute margins, and asset quality is likely to stay steady enough to avoid disrupting the sector's overall earnings path.