As of March 2025, deposit growth stood at 10.25% year-on-year (YoY) and 2.3% quarter-on-quarter (QoQ) — slightly below the 2.6% QoQ growth recorded in the October–December period (Q3FY25).
Loan growth slowed to 11% YoY and 2.3% QoQ, compared to 11.2% YoY and 3.6% QoQ in the third quarter.
While credit growth remains ahead of deposit growth, the narrowing gap has implications for bank profitability, especially as the cost of funds has peaked. This has increased pressure on net interest margins (NIMs) — a key measure of banking profitability.
Analysts expect muted net interest income (NII) growth, particularly for public sector banks (PSBs), which have raised deposits at higher costs but have not matched this with equivalent credit growth. As a result, PSBs may underperform in the fourth quarter.
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The credit-deposit ratio reached a record 80.8%, indicating that banks are lending more aggressively despite slowing deposit mobilisation. This strategy may help protect margins, but only if asset quality is maintained.
Concerns around asset quality are growing, particularly in unsecured lending segments like microfinance, which may drive up credit costs for banks exposed to these areas. Banks may have to set aside more money to cover potential bad loans, which would hurt their profits.
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Earnings pressure are expected across the board, especially for PSBs, driven by slower NII growth, lower treasury gains, and rising provisions.
Here are some Q4FY25 estimates from Kotak Securities:
- HDFC Bank: NII growth of 8% YoY, PAT growth of 5% YoY
- ICICI Bank: Both NII and PAT are expected to grow by 8% YoY
- Axis Bank: NII growth of 4% YoY, profits may fall 7% YoY
- SBI: NII may decline by 2% YoY, PAT could fall 43% YoY and over 30% QoQ
- Bank of Baroda: NII may drop 3% YoY, PAT may fall 16% YoY
In an exclusive conversation, Santanu Chakrabarti, India Analyst – BFSI at BNP Paribas, said Q4FY25 is likely to mark the bottom for earnings growth in the banking sector, although margins could take another quarter to stabilise.
The market’s attention will shift to the growth outlook rather than backwards-looking balance sheet metrics. “We are very constructive on 2025-26 (FY26) earnings growth for banks as a whole.”
He also expects an eventual pick-up in CASA or low-cost deposits, driven by improved confidence among businesses and a normalisation of working capital cycles. His top stock picks in the sector are HDFC Bank, ICICI Bank, and Axis Bank, in that order.
For the entire interview, watch the accompanying video
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