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The net interest margins (NIMs) of banks in India are expected to improve after the third quarter of the current financial year 2026 (3QFY26), according to a report by Motilal Oswal.
The report highlighted that investor opinions are divided on how long the current softness in margins will last, but there is broad consensus that NIMs for larger and better-managed banks are likely to bottom out by 3QFY26. A gradual recovery is expected thereafter. It stated "banks are likely to see NIMs bottom out by 3QFY26, followed by a gradual recovery thereafter". The report noted that NIMs remain the most closely tracked metric for the banking sector. While a contraction in margins is likely during the ongoing rate cut cycle, the extent and duration of this pressure remain under watch. Banks that have a higher proportion of floating-rate loan books, particularly those linked to the repo rate, are expected to face immediate pressure on asset yields. At the same time, deposit costs are expected to ease gradually. However, the pace and asymmetry of repricing remain key uncertainties, especially as banks continue their search for deposits. The report raised an important question, whether the banking sector is heading toward an earnings revival. It stated that the sector appears to be approaching an earnings inflection point. Growth is expected to recover from the second half of FY26 onwards as margin pressures begin to ease. Still, concerns remain over potential earnings softness in the first and second quarters of FY26 (1Q/2QFY26), driven by weaker NIMs. While the sector may experience some near-term consolidation due to margin and growth-related concerns, the report said that a gradual recovery in NIMs and loan growth, along with stable asset quality, should support improved performance in the medium term. The report stated it prefers banks with strong deposit franchises and prudent risk management. It added that normalization of credit costs in unsecured segments, a better-quality asset mix, and stronger treasury performance will help banks maintain a healthy return on assets (RoA) despite macroeconomic and interest rate-related challenges. (ANI)
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