Indian Banking Stocks Under Pressure: Q3 Earnings Outlook

The third quarter of FY25 brings challenges for Indian banking stocks as earnings pressures persist due to muted credit growth, rising funding costs, and shrinking net interest margins (NIMs). Private banks are expected to show slightly better momentum compared to public sector banks, supported by stronger asset quality and fee income growth.

Slowing Loan Growth Impacts Profitability

Loan growth has slowed significantly, affecting both net interest income (NII) and profitability. Systemic credit growth dropped to 11.5%, down from 16% last year, as banks focus on maintaining liquidity amid deposit constraints, according to Nuvama Research.

Private banks may face single-digit NII growth, while public sector banks will likely experience slower earnings momentum due to tighter margins.

Earnings Forecasts for Key Players

State Bank of India (SBI) is projected to deliver a 15% year-on-year (YoY) increase in profit after tax (PAT) for Q3, with NII growth of 7%. Stable asset quality and recovery efforts will remain key highlights for India’s largest public sector bank.

For private leaders like HDFC Bank and ICICI Bank, analysts expect double-digit NII growth and profits in the high single digits. ICICI Bank’s earnings will likely benefit from higher fee income and manageable credit costs.

Challenges for NIMs and Asset Quality

Rising term deposit costs are compressing NIMs across the sector. “Deposit growth remains sluggish at 0.7%, forcing banks to rely on expensive term deposits,” noted Motilal Oswal. While top-tier private banks like HDFC Bank and ICICI Bank may manage to stabilize margins, smaller banks, including IndusInd Bank and AU Small Finance Bank, could face sharper declines.

Asset quality is another area of concern, with slippages rising in unsecured segments like microfinance and credit cards. Bandhan Bank and AU Small Finance Bank appear most vulnerable due to their exposure to these riskier portfolios. However, larger banks such as SBI and ICICI Bank are expected to maintain stable credit costs due to their diversified loan books.

Private Banks Poised to Outperform

Private sector banks are expected to navigate challenges better than their public counterparts, leveraging stronger deposit franchises and diversified loan portfolios. Citi Research highlighted private banks’ ability to manage NIM compression more effectively through higher fee income and a larger proportion of low-cost CASA deposits.

Public sector banks, in contrast, may struggle with slower loan growth and lower margins. However, SBI is likely to buck the trend, supported by stable asset quality and recovery momentum.

Long-Term Outlook: Resilience Amid Challenges

Despite near-term hurdles, the long-term prospects for well-capitalized banks remain strong. Analysts view the current valuation levels as attractive entry points for high-quality banking stocks.

ICICI Bank and HDFC Bank remain top picks among private lenders, known for their resilience and steady earnings growth. Among public sector banks, SBI stands out for its robust balance sheet and consistent recovery performance.

Federal Bank and Axis Bank are also worth considering, with both showing strong deposit growth and moderate credit costs.

Investors will closely monitor management insights on NIM trends and asset quality, which are crucial for shaping the sector’s outlook for the remainder of FY25.

Indian banking stocks continue to offer opportunities for long-term growth, even as near-term challenges persist in the finance sector.