The Indian banking sector is facing a recalibration of earnings growth expectations amid a confluence of factors, primarily stemming from a cautious economic outlook and rising deposit costs. Initial projections for robust profit increases have been tempered, with forecasts now suggesting a significant halving of growth for the near term. This revision reflects a more realistic assessment of the challenges confronting banks as they navigate a dynamic economic landscape.
One of the primary drivers behind this revised outlook is the increasing cost of deposits. To attract and retain customers, banks are compelled to offer competitive interest rates on deposits, which in turn impacts their net interest margins (NIMs). The shift in consumer preference towards high-yield term deposits further exacerbates this pressure, making it difficult for banks to maintain a low cost of funds. While system-wide deposit growth has been observed, the challenge lies in mobilizing low-cost CASA (current account savings account) deposits, which traditionally offer banks a more favorable funding mix.
The broader economic environment also plays a crucial role in shaping the earnings trajectory of Indian banks. While India remains one of the fastest-growing large economies globally, recent assessments have indicated a slight downward revision in GDP growth forecasts. The UN projects India's economic growth at 6.3% for 2025. Factors such as evolving trade relations and the need to boost domestic consumer demand are contributing to a sense of cautious optimism.
Despite these headwinds, the Indian banking sector demonstrates underlying strength and resilience. S&P Global Market Intelligence reports that Indian banks are poised for loan growth, supported by improved profitability and declining provisions. All six of India's largest public and private sector banks recorded full-year net income growth in the latest fiscal year, driven by stable net interest margins and reduced provisioning. Average loan growth is expected to exceed 12% in FY2025-26, and 13% in FY2026-27. Public Sector Banks (PSBs) collectively posted their highest-ever net profit in FY2023-24, reflecting a marked improvement in asset quality.
However, the performance outlook varies between public and private sector banks. While overall profitability is on an upward trend, PSBs may see a slight dip in net profits in the coming fiscal year. For example, State Bank of India (SBI)'s net income is projected to decline by 3.1% in FY2025-26. In contrast, HDFC Bank's profit is forecast to grow 9.5% during the same period.
Several factors could weigh on public banks' profitability compared to their private sector peers. Credit growth tailwinds are likely to benefit private sector banks more than their public sector peers, analyst estimates show. Despite these challenges, the banking sector is adapting to the changing environment. Banks are focusing on improving operational efficiency, strengthening balance sheets, and maintaining healthy capital positions. The improving liquidity conditions and falling interest rates may provide further impetus to credit growth, potentially boosting bank profits.
In conclusion, Indian banks are experiencing a moderation in earnings growth forecasts due to economic caution and high deposit costs. However, the sector's underlying strengths, including improving asset quality and rising loan growth, provide a buffer against these challenges. While the near-term outlook may be subdued, strategic initiatives and a focus on efficiency will enable Indian banks to navigate the evolving landscape and sustain long-term growth.
