Banks Turn to Bond Market Gains to Support Earnings as Credit Demand Slows

Strategic Insights -

Scheduled commercial banks have seen pre-provision operating profits grow by 12.3 per cent year-on-year to Rs 1.12 lakh crore in Q1FY26, with public sector banks growing by 9.4 per cent and private banks by 14.1 per cent. The growth in treasury income has supported the bottomline of these banks, driven by mark-to-market gains on government securities. However, net interest margins have declined by 22 basis points year-on-year to 3.14 per cent due to subdued credit growth and quicker reduction in lending rates compared with deposit rates.

Key Takeaways:

  • Pre-provision operating profits of 22 banks grew by 12.3 per cent year-on-year to Rs 1.12 lakh crore in Q1FY26.
  • Public sector banks saw a 9.4 per cent growth in operating profit, while private banks grew by 14.1 per cent in Q1FY26 compared with Q1FY25.
  • Treasury income as a percentage of total assets increased by 20 basis points from 0.20 per cent in Q4FY25 to 0.4 per cent in Q1FY26 due to mark-to-market gains on government securities.
  • Net interest margins declined by 22 basis points year-on-year to 3.14 per cent in Q1FY26 due to subdued credit growth and quicker reduction in lending rates compared with deposit rates.
  • HDFC Bank's MD and CEO, Sashidhar Jagadishan, expects retail credit demand to pick up in the second half of the year, driven by the festive season.
  • Bank of Baroda's MD and CEO, Debadatta Chand, mentioned that corporates are de-leveraging and tapping the bond market at cheaper rates, leading to improved liquidity conditions in the second half.
  • CareEdge Ratings expects net interest margins to contract by 20-25 basis points over FY26 due to the cumulative impact of rate cuts.
  • The firm also predicts that bond yields will stabilise in the coming quarters, leading to a tapering off of treasury gains and a sharper focus on core earnings and asset quality.

Statistics:

  • 12.3 per cent year-on-year growth in pre-provision operating profits to Rs 1.12 lakh crore in Q1FY26.
  • 20 basis points increase in treasury income as a percentage of total assets from 0.20 per cent in Q4FY25 to 0.4 per cent in Q1FY26.
  • 22 basis points year-on-year decline in net interest margins to 3.14 per cent in Q1FY26.
  • 9.8 per cent credit growth as of July, compared with 14 per cent in the year-ago period.

Sources:

  • CareEdge Ratings
  • RBI
  • HDFC Bank
  • Bank of Baroda