Indian banks are bracing for a subdued performance in the September quarter of 2025, characterized by slow loan growth and muted earnings. Several factors are contributing to this tepid outlook, including a slowdown in both retail and corporate lending segments. Analysts anticipate that weaker treasury gains and potential compression of net interest margins (NIM) will further dampen earnings.
Loan growth is expected to remain muted, hovering around 10%, with corporate and large retail loan demands remaining soft. Data from the Reserve Bank of India (RBI) indicates that system credit growth edged up to 10.3% year-on-year as of September 5, 2025, compared to 10% as of August 22, 2025. Deposit growth has also moderated, reaching 9.8% from 10.2% over the same period. The system credit-deposit ratio remains elevated at 79% as of September 2025.
The Reserve Bank of India (RBI) lowered its interest rate by 100 basis points during the year to stimulate consumption and investment amidst a slowing economy. However, these rate cuts have put pressure on banks' margins in the short term, as lenders tend to reduce loan rates faster than they adjust deposit rates. As a result, analysts are forecasting a year-on-year decline in profits for private banks during the September quarter, with only a marginal increase in net interest income (NII). Sector-wide profit is predicted to fall by 7% to 12% year-on-year, with state-owned banks potentially underperforming their larger, private-sector counterparts. Jefferies estimates that the profits of large banks will fall 12% year-on-year, a stark contrast to the 8% growth in the same quarter last year and the marginal 2% growth in the June quarter.
Rising bond yields are also expected to negatively impact treasury income, which previously helped cushion earnings. According to Axis Securities, treasury gains are unlikely to provide the same level of support to earnings in the September quarter due to the increase in bond yields.
Despite the challenges, asset quality trends are expected to remain stable, supported by controlled slippages and robust provision buffers. However, some stress is still evident in unsecured retail and microfinance loan segments. Concerns about asset quality, particularly in the SME and commercial vehicle segments, persist.
Looking ahead, analysts anticipate a recovery starting in the second half of fiscal year 2026, driven by stronger consumption, government tax relief, and increased growth in unsecured credit. Nomura analyst Ankit Bihani expects the September quarter to be a turning point, with earnings momentum improving from the December quarter onwards as margin pressure eases and asset quality trends strengthen. With the RBI maintaining stable rates in recent meetings, banks' margins are expected to benefit from falling borrowing costs and adjustments to deposit rates.
Despite the expected subdued earnings, Indian banking stocks have outperformed the broader market this year. Sector indices such as NSE Bank, Nifty Private Bank, and Nifty PSU Bank have risen between 10% and 15% year-to-date, compared to the Nifty 50's 6% increase. This suggests that investors are optimistic about a potential comeback for Indian banks, supported by healthy asset quality and expectations of renewed loan growth as rates stabilize.
Several banks are scheduled to announce their Q2 results in the coming days, including Axis Bank, ICICI Bank, and HDFC Bank. Market participants will be closely monitoring these results for insights into the overall health and performance of the Indian banking sector.
