Indian banks are likely to deliver another quarter of steady profit expansion in the second quarter of FY27, with earnings projected to rise 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, disciplined balance sheets and stable asset quality, even as funding dynamics remain in focus.
Private Banks Lead
Kotak expects private sector banks to outperform public sector lenders in the quarter, reflecting their stronger operating leverage, better liability management and relatively healthier loan mixes. Private banks have generally been quicker to reprice deposits, protect margins and preserve asset quality through the rate cycle, while many state-owned banks continue to navigate a more mixed operating environment.
The projected earnings growth suggests that the sector remains on a firm footing despite a moderation in some parts of credit expansion and a more competitive deposit market. For investors, the key question is not whether profits will grow, but how much of that growth will be driven by core lending income versus treasury gains, fee income and lower credit costs.
FCNR Inflows Lift Deposits
A notable feature of the quarter is the expected support from foreign currency non-resident, or FCNR, deposits. Kotak said these inflows should aid deposit growth across the system, helping banks strengthen their funding base at a time when liability mobilisation remains a central industry priority.
FCNR deposits can be an important source of stable funding, particularly when domestic deposit growth is uneven or when banks are competing aggressively for retail savings. However, the same inflows may also work against margins in the near term. Because FCNR deposits are linked to foreign currency funding and hedging costs, they can raise the effective cost of funds, especially if banks are drawing them in at scale.
That dynamic could temporarily weigh on net interest margins, or NIMs, even if overall deposit growth improves. For lenders, the trade-off is clear: stronger liquidity and balance-sheet comfort on one side, and some pressure on profitability on the other. Kotak's note suggests the margin impact is likely to be manageable rather than structural, but it remains a key variable for the quarter.
Asset Quality Stays Stable
The broader credit backdrop appears stable. Kotak said it sees no major signs of deterioration in asset quality, indicating that banks are not facing a broad-based rise in stress across retail, corporate or small-business portfolios. That is an important signal for the sector, which has spent several years cleaning up legacy bad loans and improving underwriting standards.
Stable asset quality typically supports earnings by keeping provisioning requirements contained. It also gives banks room to maintain growth without having to sacrifice credit discipline. In the current environment, where loan growth is still positive but not exuberant, the absence of fresh stress in the system is likely to be welcomed by both lenders and investors.
The combination of steady earnings growth, resilient credit quality and deposit support from FCNR inflows paints a picture of a banking sector that is still expanding, but with margins under watch. The quarter is unlikely to be defined by any dramatic deterioration in fundamentals. Instead, the focus will be on the pace of margin compression, the relative performance gap between private and public sector banks, and whether deposit mobilisation can continue without eroding profitability too sharply.
For the market, the results season may reinforce a familiar theme: Indian banks remain among the more durable earnings compounds in the domestic equity universe, but the path ahead will depend on how effectively they balance growth, funding costs and margin preservation. Kotak's forecast suggests that balance is still intact, even if FCNR inflows introduce a short-term headwind to net interest income.