Analysts expect the profitability of banks to remain under pressure in the third quarter as deposits and credit growth have aligned at 11.5 per cent in December.

Slower recovery in stressed assets, higher provisions, lower treasury gains are among the dampeners for the quarter as anticipation builds for an interest rate cut by the Reserve Bank in its February monetary policy meeting.

“We expect overall profitability for private sector banks to remain subdued in the third quarter, dragged down by slower credit growth, contracting margins, elevated operating expenses and loan loss provisions,” said Emkay Research in its earnings outlook.

“Public sector banks too will report some earning moderation sequentially due to lower treasury gains hurt by the recent resurgence in government security yields, slower NPA recovery, and margin softness, partly offset by lower operating expenses and contained credit costs, as corporate asset quality remains well under control,” it said.

“With the repo unchanged for more than a year, lending rates have remained stable, while funding costs have been trending upwards due to an ongoing re-pricing and an increase in select tenors by certain banks.”

“Lending rates may remain under pressure, and NIMs for scheduled commercial banks could see a slight decline in the coming quarters,” said Care Ratings.

“We expect our coverage universe banks to report stable to marginally lower NIMs, with small finance banks witnessing sharper NIM compression while the larger private banks and PSU banks reporting stable to a more calibrated decline in margins. We do not see any respite on earnings for banks, which is likely to de-grow by 6 per cent quarter on quarter in Q3FY25E,” said Axis Securities.

PL Capital in its earnings preview for the sector said that asset quality may worsen in the third quarter on account of slippage in agri-loans, while provision costs are expected to remain elevated.

“Core profit after tax for our coverage banks is likely to decline by 2.9 per cent quarter- on-quarter due to higher provisions,” said PL Capital.

“Liquidity considerations as well as the pressures of a significantly weaker-than-expected GDP print should ensure a February 2025 rate cut as we expect. If anything, we believe that the likelihood of the total cut exceeding our 50 basis points expectation is clearly increasing, given this set up,” said BNP Paribas.