Banks Brace For Another Tough Quarter Amid Margin Pressure And Credit Stress: Analysts

The banking and financial sector as a whole is heading into another challenging earnings season for the second quarter of FY26, with analysts flagging margin compression, weak loan growth, and elevated credit costs as key headwinds. Both Macquarie and BofA Global Research have released cautious previews, highlighting the impact of rate cuts, asset quality concerns, and the importance of festive demand commentary as banks prepare to report results around Diwali.

Macquarie notes that “2QFY26E is again going to be a tough quarter (after 1QFY26) marred by sharp margin compression, weak loan growth and elevated credit costs.” The brokerage expects muted earnings growth across the board, with core pre-provision operating profits likely to be even weaker.

One potential bright spot could be treasury gains from the YES Bank stake sale, which Macquarie says is “the only saving grace” this quarter. However, even large banks like ICICI, HDFC Bank, and Axis Bank are expected to report “very weak” loan growth.

Credit stress is also expected to persist in NBFCs, particularly in vehicle finance small-ticket SME loans, and unsecured personal loans. Macquarie add, “Floods and extended monsoon would also have had an impact on NBFCs this quarter”

On PSU banks, the note cautions that while major asset quality deterioration is unlikely, “we need to closely observe whether there is any SME stress and pay particular attention to management commentary surrounding SMEs, especially those affected by the US tariff issue.”

BofA Global Research echoes the cautious tone, stating that “India banks' 2Q26 are likely to be soft on NIM normalization (most banks) and elevated credit costs (mainly mid-size private banks).” The firm now expects the bottoming out of net interest margins (NIMs) to be pushed to early FY27, especially if the RBI proceeds with “50 bp cuts” as projected.

The brokerage warns of “another round of EPS cuts around the results season as consensus catches up,” adjusting its own estimates based on a shallower growth trajectory.

Among the large banks, BofA sees HDFC and ICICI as relative outperformers. “We see relatively defensive earnings and guidance from HDFC and ICICI. They also have the least AQ risks,” the note says, adding that “HDFC and ICICI are looking quite attractive from a relative valuation perspective.”

For ICICI Bank, BofA expects “moderation in loan growth but slightly better than industry level,” and notes that “AQ risk remains benign.” HDFC Bank is projected to see “controlled and stable credit cost to support profit growth,” though NIM pressure and a high base for non-interest income may weigh on results.