India's financial sector sees mixed Q4 FY26; deposit growth strong

India's financial sector expects a mixed Q4 FY26 performance with strong deposit growth outpacing credit expansion and improving asset quality, but facing pressure on margins and profitability, according to a PhillipCapital report.

India's financial sector is likely to see a mixed performance in the fourth quarter of FY26, with stronger deposit growth, improving asset quality, but pressure on margins and profitability, according to a report by PhillipCapital.

Deposit Growth Outpaces Credit Expansion

The report highlighted that deposit growth has emerged as a key positive surprise during the quarter, outpacing credit expansion and easing liquidity pressures in the system. "Banking balance sheets are expected to witness healthy growth sequentially across both assets and liabilities, with liability franchises outperforming this quarter," the report said.

It added that loan growth (excluding HDFC Bank) rose about 5.1 per cent sequentially, while deposits increased at a sharper pace of 5.6 per cent. The improvement in credit growth was supported by seasonal factors, affordable EMIs, easing stress in the unsecured segment, and increased government spending.

The report further said that deposit growth exceeding credit growth has helped ease loan-to-deposit ratios. "With deposit growth outpacing credit expansion in Q4FY26, loan-to-deposit (LDR) levels eased by 50-60 bps... creating headroom for future credit growth," it stated.

Sustainability of Deposits a Key Monitorable

However, it cautioned that the sustainability of deposits remains a key monitorable, particularly due to increased reliance on certificates of deposit in the last quarter of FY26.

Profitability and Margins Under Pressure

On profitability, the report pointed to pressure on margins. "Muted NII growth due to margin contraction... sector NIM will decline... as loan repricing continues," it said, estimating net interest income (NII) growth at 8.2 per cent year-on-year.

Pre-provision operating profit is also expected to remain subdued. "Pre-provision profit should grow 0.2 per cent YoY... due to low treasury contribution," the report noted.

Asset Quality Trends Remain Encouraging

Despite this, asset quality trends remain encouraging. The report said, "Credit cost should be benign due to continued improvement in asset quality," with credit costs seen declining to 45 basis points in Q4FY26.

The report added that gross and net NPAs are expected to improve further, reflecting sustained balance sheet strength across banks.

Strong Growth in Non-Banking Sector

In the non-banking space, the report flagged strong growth momentum. Gold financiers are expected to report 25 per cent plus gold loan growth.

Overall, the report maintained that while growth remains healthy across segments, margin pressures and treasury performance will be key factors shaping earnings in the near term. (ANI)

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