New Delhi

Indian banks are expected to report a steady first quarter of FY27, with earnings broadly flat as pressure on net interest margins (NIMs) and weaker non-interest income continue to weigh on profitability, according to Kotak Institutional Equities.

The brokerage said the banking operating environment has improved compared with the previous quarter. Retail credit performance remains resilient, corporate balance sheets are conservatively leveraged, and government-backed schemes such as ECLGS and CGTMSE are helping support MSME lending.

Despite strong headline credit growth, Kotak said underlying demand remains soft. "We believe risks are skewed to the downside, particularly given the slower-than-expected revival in retail borrowing. Some recent demand also appears transient and reversible," the report said.

Kotak expects strong FCNR deposit mobilisation to ease funding pressures across the banking system and lower deposit costs, with private sector banks likely to benefit more because of their stronger deposit franchise.

The report added that pressure on NIMs could gradually ease as competition for deposits moderates. However, public sector banks are increasingly relying on costlier term deposits, which could raise funding costs.

As a result, Kotak sees "limited asset quality-driven investment opportunities at this stage," the report noted.

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For Q1 FY27, Kotak expects net interest income (NII) to grow 9 per cent year-on-year, while non-interest income may decline 20 per cent. Private sector banks are projected to post 11 per cent earnings growth, whereas public sector banks may see a 15 per cent decline.

"We expect 1QFY27 to be another steady quarter with negative surprise, if any, coming from possible NIM contraction," Kotak said.