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PL Capital on Indian Banks: Earnings Growth May Halve in FY26. Is It Time to Reassess Your Portfolio?

  • 21st July 2025
  • 12:40:00 PM
  • 5 min read
PL Capital

Mumbai | July 21 – After driving a large part of the Nifty’s gains in recent years, Indian banks are entering a slower earnings phase. According to PL Capital, earnings growth for the sector could ease to 6.5% in FY26, nearly half the pace of previous years, before picking up to 16.1% in FY27 as the rate environment improves and credit demand revives.

Yet, recent Q1FY26 results from Axis Bank, HDFC Bank, ICICI Bank, and Union Bank reveal resilience, even in a tougher environment. For investors tracking “Indian banks earnings growth” and “Q1FY26 results,” the sector’s evolving narrative requires sharper stock selection and patience.

Margins Under Pressure, Credit Demand Softens

Banks collectively account for nearly a third of the Nifty’s weight, making their performance critical for market direction. While policy rates are softening, deposit repricing has lagged, squeezing net interest margins (NIMs).

Retail credit demand, strong in the previous festive season, has softened as consumers delay discretionary purchases. Corporate loan growth remains uneven amid cautious private capex, while high-term deposit rates are keeping funding costs elevated.

“This is not a crisis; it’s a recalibration phase. Asset quality remains solid, but banks will need to protect profitability in a high-cost environment,” says a PL Capital banking analyst.

Q1FY26: What the Numbers Reveal

Axis Bank: Navigating a Soft Patch

Axis Bank reported Q1FY26 PAT of ₹6,220 crore, up 11% YoY, while NIM contracted to 3.51% due to funding cost pressures and lower yields. Retail loan growth slowed to 6.5% YoY, while SME lending grew 16.3% YoY, and large corporate loans rose 8.6% YoY, providing some balance.

The bank indicated that 80% of new slippages are secured and likely to recover, with a focus on growing advances above system rates in FY26.

“Axis Bank’s near-term profitability was impacted by lower NIMs and higher provisions, but its structural strengths and digital execution position it for a recovery as funding costs ease,” notes PL Capital. We maintain a Buy rating on Axis Bank with a target price of ₹1,375.

Click here for more detailed analysis on Axis Bank here

HDFC Bank: CASA Strength, Festive Demand Potential

HDFC Bank reported Q1FY26 PAT of ₹18,156 crore, up 12% YoY, maintaining strong asset quality with GNPA steady at 1.4%. NIM eased to 3.46% due to deposit cost pressures. Loan growth stood at 6.7% YoY, with gold loans up 26.8% YoY, offsetting slower mortgage disbursals amid PSU competition.

The bank expects festive season demand to drive retail credit growth in the coming quarters, while maintaining a focus on CASA to manage funding costs.

“HDFC Bank’s liability management and CASA strategy position it well to capture demand recovery while managing high deposit costs,” says PL Capital. We maintain a Buy rating on HDFC Bank with a target price of ₹2,150.

Click here for more detailed analysis on HDFC Bank here

ICICI Bank: High Margins and Consistent Delivery

ICICI Bank delivered Q1FY26 PAT of ₹12,777 crore, up 12% YoY, ahead of expectations, supported by higher other income and strong cost control. The bank retained its industry-leading NIM at 4.42% and achieved loan growth of 11.5% YoY, led by a 29.7% increase in business banking, while retail lending grew 6.9% YoY.

GNPA remained stable at 1.7%, while the bank expects the repo rate cut impact to emerge from Q2FY26, with CRR cuts aiding margins later in the year.

“ICICI Bank’s granular retail book and high-margin profile make it a strong pick for quality-focused investors,” PL Capital highlights. We maintain a Buy rating on ICICI Bank with a target price of ₹1,730.

Click here for more detailed analysis on ICICI Bank here

Union Bank: Gradual PSU Improvement

Union Bank reported Q1FY26 PAT of ₹3,719 crore, up 17% YoY, supported by treasury gains. NIMs were stable at 2.65%, while loan growth came in at 8.9% YoY, driven by retail and gold loan segments.

GNPA remained steady at 3.5%, with the bank guiding towards a reduction to 2.6% by FY27 through focused recoveries.

Union Bank is moderating deposit growth to reduce dependence on bulk deposits while focusing on higher-yield project lending to support margins.

“Union Bank’s improving asset quality and steady retail growth position it as a stable PSU opportunity for patient investors,” says PL Capital. We maintain a Buy rating on Union Bank with a target price of ₹150.

Click here for more detailed analysis on Union Bank here

The Road Ahead

While FY26 is likely to see muted earnings growth for Indian banks, PL Capital expects the sector to rebound in FY27 as:

  • Rate cuts ease deposit costs,
  • Festive and rural demand lifts credit growth,
  • Asset quality remains stable across large lenders.

For investors tracking “Q1FY26 Indian bank results,” “NIM trends,” and “best Indian bank stocks for 2025,” the current phase is an opportunity to accumulate quality names with a medium-term perspective.

“This is a market where selectivity and patience will pay off. Quality banks like Axis, HDFC, ICICI, and Union Bank are positioned to navigate the slowdown and emerge stronger,” notes the brokerage

PL Capital

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

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