Whalesbook
Private Banks Face Profitability Drop in FY26
Private sector banks experienced a moderation in their return on equity (RoE) for the fiscal year 2025-26. This decrease was largely driven by shrinking net interest margins (NIMs) and significant losses on treasury portfolios. Banks faced a dual challenge: loan interest rates repriced faster than deposit rates in a falling interest rate environment, directly impacting NIMs. Additionally, a sharp rise in government security yields in the final quarter of FY26 caused substantial mark-to-market losses on their treasury investments.
Experts noted that the quicker repricing of loans compared to deposits in a period of falling repo rates put pressure on NIMs throughout FY26. This, combined with an increase in credit costs, negatively affected overall profitability, leading to lower RoE. Slower deposit growth compared to loan expansion also contributed to NIM pressure, keeping banking system profits within a limited range and consequently lowering both return on assets (RoA) and RoE.
Key Banks See Declining Return Metrics
Financial results show a consistent trend across major private banks. HDFC Bank's RoE slightly dipped to 14.3% in FY26 from 14.6% the previous year, with its NIM at 3.38% in the March quarter. Axis Bank experienced a more significant decline in RoE to 13.15% from 16.52%, its domestic NIM falling to 3.73% and profit after tax (PAT) decreasing to Rs 24,457 crore. ICICI Bank's standalone RoE moderated to 16% from 17.9%, with its NIM easing to 4.32%. Kotak Mahindra Bank's return ratio slipped to 11.08% from 12.57%, and its NIM declined to 4.67%. South Indian Bank reported a slight decrease in RoE to 12.76%, with its NIM moderating to 2.95%. Bandhan Bank saw a sharper drop in RoE to 4.8% from 11.6%, and its interest margin fell to 6.2%.
FY27 Outlook Remains Challenging
The outlook for fiscal year 2027 indicates continued pressure on the banking sector's profitability. Challenges are expected in attracting deposits at competitive rates, which could increase funding costs. Furthermore, a rise in credit defaults and related expenses might impact earnings, partly due to ongoing geopolitical uncertainties. Despite these difficulties, internal accruals are anticipated to remain strong enough to support the banking system's expected growth needs. Current P/E ratios for these banks show varied market valuations: HDFC Bank at approximately 15.56, ICICI Bank at around 16.64, Axis Bank at 15.00, Kotak Mahindra Bank at 20.20, South Indian Bank at approximately 7.45, and Bandhan Bank at 25.29.