Indian Banks Set for Solid June Quarter as Loan Growth Drives Earnings

India's banking sector is on course to deliver another dependable set of quarterly results, with brokerages forecasting healthy profit growth for the three months ended June 2026. Strong loan expansion, contained credit costs and disciplined operating expenses are expected to support earnings across both private and public sector lenders, even as margin pressure and elevated funding costs continue to test the sector's underlying profitability.

JM Financial expects banks under its coverage to report approximately 14% year-on-year growth in profit after tax during the June quarter, underpinned by steady business momentum and benign provisioning requirements. Net interest income growth is projected to reach nearly 11% year-on-year, aided by robust lending activity, while lower government bond yields are likely to provide an additional lift through treasury gains. It is worth noting that the investment landscape across high-performance sectors globally - from finance to esports, where the latest team falcons results have drawn considerable market attention - reflects a broader pattern of well-capitalised entities outperforming peers when fundamentals are sound. For Indian banks, those fundamentals, at least in terms of credit quality and volume, remain largely intact heading into results season.

Motilal Oswal Financial Services (MOFSL) takes a constructive medium-term view, projecting earnings across its banking coverage universe to grow at a 15% compound annual growth rate between FY26 and FY28. The brokerage draws a clear distinction between private and public sector lenders, forecasting earnings growth of around 20.5% CAGR for private banks against 9.6% for PSU banks - a divergence that reflects both structural efficiency advantages held by larger private franchises and the relatively slower pace of balance sheet optimisation at state-owned institutions.

Credit Growth Leads, But the Deposit Gap Widens

Loan growth is the central engine powering the earnings outlook. JM Financial's analysis of provisional business updates from 28 banks showed aggregate loan growth of approximately 16.4% year-on-year, while deposit growth lagged at 12.3%, pushing credit-deposit ratios higher across the system. MOFSL estimated systemic credit growth at 17.7% year-on-year by mid-June, supported by stronger corporate borrowing, resilient retail demand and continued momentum in MSME and gold loan segments. The brokerage expects credit growth to moderate to around 14% during FY27 but characterises that trajectory as healthy rather than concerning.

The widening gap between loan and deposit growth is not without consequence. A rising credit-deposit ratio signals that banks are increasingly leaning on wholesale funding sources to sustain lending volumes. Wholesale money is structurally more expensive than customer deposits, which feeds directly into the funding cost pressures both brokerages have flagged. JM Financial noted that deposit mobilisation improved at Axis Bank and HDFC Bank specifically, though advances continued to outpace deposit inflows even at those institutions.

Margin Compression Remains the Defining Constraint

Despite the encouraging growth story, net interest margins are expected to narrow further on a sequential basis. JM Financial anticipates NIM compression of between 5 and 10 basis points quarter-on-quarter, attributing the squeeze to stronger growth in lower-yield corporate lending, heavier issuance of higher-cost certificates of deposit and seasonal agricultural slippages. ICICI Bank and Axis Bank are expected to see margins contract by 7 to 8 basis points, HDFC Bank by 2 to 3 basis points, while Kotak Mahindra Bank is projected to hold broadly stable.

Pressure is more acute among mid-sized private lenders. MOFSL forecasts NIM contraction of around 13 basis points for AU Small Finance Bank, 14 basis points for Equitas Small Finance Bank and 10 basis points for Bandhan Bank. PSU bank margins, by contrast, are expected to remain largely stable - a relative advantage that may not offset the structural earnings growth gap against private peers, but does provide some near-term insulation.

Asset Quality Holds, With Pockets of Seasonal Stress

The asset quality picture is broadly reassuring. Both JM Financial and MOFSL expect non-performing loan trends to remain stable, with provisioning buffers accumulated in the March quarter continuing to provide a degree of cushioning. Collection efficiencies in unsecured retail and microfinance portfolios are improving, and credit costs are expected to stay contained. Agricultural and microfinance segments carry the usual seasonal risk heading into the monsoon period, and MOFSL added a note of caution around business banking and commercial vehicle portfolios, warning that sustained geopolitical tensions and higher input costs could eventually translate into stress if conditions do not ease.

On stock preferences, both brokerages tilt decisively toward private sector names. JM Financial's top picks include ICICI Bank, Axis Bank, State Bank of India, Ujjivan Small Finance Bank, DCB Bank and City Union Bank. MOFSL's preferred names are ICICI Bank, HDFC Bank, State Bank of India and AU Small Finance Bank, with the brokerage citing healthy credit growth, resilient asset quality and an anticipated gradual easing in funding costs over the medium term as the core investment case. SBI's presence on both lists reflects its scale, improving return profile and its position as the most compelling PSU banking exposure available to investors navigating the private-versus-public divide.