Bank profitability improves, outlook healthy on advances growth, lower interest expenses: Report

NEW DELHI:The profitability of banks improved in the third quarter, supported by higher Net Interest Income (NII), lower slippages, better recoveries, and improved fee income, reflecting continued stability in the banking sector, according to a report by Systematix Group.

The report noted that the improvement in profitability was primarily driven by strong growth in core income and better asset quality trends. Lower slippages and improved recoveries helped reduce stress on balance sheets, while higher fee income further supported overall earnings during the quarter. It stated, “Margins largely improved sequentially, expected to remain rangebound going forward”.

Going forward, the report mentioned that the profitability is expected to remain healthy, driven by improved advances growth and lower interest expenses due to the ongoing deposit repricing cycle. The benefit of lower Cash Reserve Ratio (CRR) requirements is also expected to support bank earnings.

Additionally, normalisation of slippages in the unsecured segment, supported by lower microfinance institution (MFI) slippages, is likely to further strengthen profitability trends. During the quarter, the Yield on Advances (YOA) contracted for most banks, as expected. However, the impact was largely offset by a decline in the cost of deposits and borrowings, which helped protect margins.

The report stated that repricing of term deposits (TD) has started reflecting in financial performance, with banks witnessing an accelerated reduction in the cost of deposits. It also noted full impact of the -25 basis points repo rate cut in December 2025 is expected to be visible in the fourth quarter.

While the rate cut may have some adverse impact on margins, this is expected to be partially offset by the continued repricing of existing term deposits, which will help reduce overall funding costs. Deposit growth also continued at a reasonable pace during the quarter. However, deposits continued to lag behind advances growth, indicating tighter liquidity conditions and continued competition among banks for deposit mobilisation.

Overall, the banking sector remains on a stable footing, supported by strong income growth, improving asset quality, and favourable cost trends, with profitability expected to remain healthy in the coming quarters. (ANI)