Treasury Gains Cushion Weak Credit Growth, Margins for Banks in Q1 FY26: Report

The profitability of scheduled commercial banks (SCBs) registered only a modest growth in the June quarter of FY26, as treasury gains helped offset weak credit offtake and narrowing margins.

According to a report by CareEdge Ratings, SCBs’ net profit rose 3.1 per cent year-on-year to Rs 0.92 lakh crore in Q1FY26. On a sequential basis, however, profit slipped 2.2 per cent due to muted business momentum, margin compression, and higher provisioning.

The divergence between public and private sector banks was stark. Public sector banks (PSBs) recorded a 10.9 per cent year-on-year rise in profit to Rs 0.47 lakh crore, while private sector banks (PVBs) saw their net profit dip 3.9 per cent to Rs 0.45 lakh crore.

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The report attributed the earnings decline in private banks largely to stress in the microfinance and unsecured loan segments, which forced higher provisions. In contrast, PSBs benefitted from treasury gains, recoveries from written-off accounts, growth in housing loans for larger players, and normalised operating costs.

Sanjay Agarwal, Senior Director at CareEdge Ratings, noted that the profit growth in Q1 was significantly supported by treasury gains, including one-off income booked by a large private bank. “As treasury support fades due to bond yields stabilising, a sharper focus on earnings and asset quality will be critical to maintain profitability in the coming quarters,” he said. Agarwal also highlighted that despite recent policy rate cuts, high deposit rates have kept funding costs elevated, pressuring net interest margins (NIMs).

“With the festive season approaching and credit demand picking up, banks are expected to recover momentum in the second half of the fiscal year,” he added.

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Return on Assets (RoA) for SCBs slipped to 1.28 per cent (annualised) in Q1FY26, down nine basis points year-on-year and five bps sequentially, reflecting compressed margins and higher provisions.

On the balance sheet front, banks continued to maintain strong capital buffers. The median Capital Adequacy Ratio (CAR) of SCBs improved by 145 bps year-on-year. Median Common Equity Tier-1 (CET-1) ratio of PSBs and PVBs rose 187 bps and 72 bps, respectively, to 15.3 per cent and 15.6 per cent. CareEdge said higher retained earnings and reserves boosted capital positions, even as growth in risk-weighted assets remained moderate.