Banking Sector Outlook Brightens: Capital Market Company Elara Forecasts Strong Q3 FY26 Loan Growth

New Delhi: System loan growth has picked up and Q3 FY26 is expected to show better loan growth and improved net interest margins, a report said on Saturday. The report from Elara Capital said the quarter should also see lower slippages in unsecured and microfinance institutional loans and steady recovery trends that may benefit credit costs.

The report, however, flagged that deposit flows remain weak and incremental credit‑deposit ratios are running very high. "Even with better Q3 outlook, we expect certain pressure points on deposits and anticipate NIM revisions for FY27, which could lead to earnings revision," the brokerage said. The report noted that PSU banks are expected to report a steady quarter, with impressive performance from ICICI Bank, Kotak Mahindra Bank and SBI among larger banks.

It favoured Karur Vysya Bank and AU Small Finance Bank among mid-sized banks. "While we expect earnings to be resilient for most frontline private banks, we see softer earnings for a few private and mid-sized banks," it added. Asset quality is expected to be steady for most banks, except some surge in seasonal agri slippages, the brokerage said, adding, Q3 will likely be characterized by steady recovery trends, which will help cushion credit cost impact. The firm forecasted H2FY26 to be stronger but cautioned that FY27 earnings expectations may need reassessment.

Risk-reward seems to be sharply tilted towards frontline private banks with strong earnings resilience and reasonable valuation. HSBC Mutual Fund said in a recent report that it is overweight on banks and non‑bank financial companies (NBFCs), arguing net interest margins for banks should improve in FY27. Private banks’ asset quality is expected to recover and drive mid‑teens earnings growth in FY27 after a slow FY26, the report said. NBFCs are delivering strong earnings growth driven by strong credit demand and improving margins on the back of decline in interest rates. ­­­­

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