New Delhi [India], July 1 (ANI): Banks are expected to report muted earnings for the first quarter of FY26 because of weak loan growth, lower margins, seasonally soft fee income, and higher slippages weigh on performance, according to a report by IIFL Capital.

The report estimates that banks' profit after tax (PAT) will decline by 2 per cent year-on-year and 4 per cent quarter-on-quarter.

It said, 'We expect muted loan growth, NIM contraction, seasonally weak fee income and higher slippages to weigh on banks' 1Q PAT (-2 per cent yoy/-4 per cent qoq).'

Business momentum remained sluggish during the quarter, with system-wide loan and deposit growth staying somewhat flat on a sequential basis.

The report noted that system loan growth slowed to 9.6 per cent year-on-year, down from 11 per cent in the previous quarter.

On a quarter-to-date basis, loan growth was just 0.4 per cent until June 13, compared to the usual 1.5-2.0 per cent growth seen in the first quarter of the past few years.

Loan growth continued to moderate across segments, except MSME loans which grew at mid-teen levels.

Other segments remained weak, with NBFC lending flat year-on-year, large corporates up just 1 per cent, vehicle loans rising 6 per cent, and housing and unsecured loans growing 9 per cent.

The report expects net interest margins (NIMs) to contract by 8-25 basis points quarter-on-quarter in Q1. The decline in margins is driven by fall in loan yields of 10-20 basis points, which is more to offsets the decline in deposit rates.

Savings account rates have been reduced by 20-350 basis points since December 2024, while retail term deposit rates have fallen by 20-100 basis points. Wholesale deposit rates also cooled off by 1 percentage point in the quarter.

The report pointed out that average system liquidity turned into a surplus of Rs 2 trillion in Q1, compared to a deficit of Rs 1.7 trillion in the previous quarter.

However, lower loan demand and the reduction in deposit rates have resulted in a fall in average outstanding spreads, by 9 basis points for PSU banks and 26 basis points for private banks till May.

Seasonally weak fee income and sticky operating expenses are expected to lead to negative jaws for most banks, resulting in flat core pre-provision operating profit (PPOP) growth.

Additionally, credit costs are likely to inch up due to seasonal rise in slippages and ageing provisions.

The report expects margins to continue contracting by a cumulative 22-35 basis points till the second quarter of FY26. Margins are likely to stabilise in Q3 and begin to expand again from Q4 onwards. (ANI)