PSB Profits Dip 1.5% Despite 11.7% Credit Growth; Treasury Income, Recoveries Weigh
Despite a robust 11.7% year-on-year (YoY) surge in credit growth, driven by retail, agriculture, and MSME lending, public sector banks (PSBs) collectively reported a 1.5% decline in net profit for the September quarter (Q2 FY26) — once adjusted for the one-time gain by State Bank of India (SBI).
The profit moderation was primarily due to weaker treasury income and muted recoveries from written-off accounts, even as lending momentum stayed strong.
Earnings Snapshot: Pressure on Other Income
Out of the 12 PSBs, Bank of Baroda and Union Bank of India posted a year-on-year fall in net profit for the July–September quarter, largely due to lower other income and subdued recoveries.
After four quarters of double-digit growth, other income slowed to 8.4% YoY, primarily on account of reduced treasury gains amid volatile bond yields.
The SBI exception stood out — the bank recorded an extraordinary gain after completing the divestment of its 13.18% stake in Yes Bank to Sumitomo Mitsui Banking Corporation (SMBC) of Japan for ₹8,888.97 crore, retaining 10.8% ownership post-transaction.
NII and Margin Trends
The net interest income (NII) of PSBs rose 2.5% YoY, higher sequentially but muted compared with 6.1% growth a year ago.
Net Interest Margins (NIMs) continued to moderate during the quarter, though bankers expect stability in the second half of the fiscal year.
“Transmission on the liability side is yet to be completed, especially for retail and bulk deposits,” said Rajneesh Karnatak, MD & CEO of Bank of India.
“We expect full transmission by Q3 FY26, post which NIMs should stabilise and begin improving.”
Credit and Deposit Growth Dynamics
On average, PSB loan growth stood at 11.7%, while deposit growth came in at 9.4% YoY, according to compiled data.
Growth was primarily driven by the RAM segment — retail, agriculture, and MSME lending.
Except for Union Bank of India, all other PSBs recorded double-digit advances growth.
However, deposit momentum moderated, with the average CASA ratio slipping to 38.58% as of September 30, compared with 38.74% in Q1 and 39.49% a year earlier.
Bankers reiterated plans to increase CASA share in upcoming quarters to strengthen margins.
Forward Guidance
Looking ahead, PSBs expect credit demand to remain firm in H2 FY26, supported by retail consumption and infrastructure financing.
“We expect credit and deposit growth for scheduled commercial banks to stay in the 11–12% range during FY26,” said C.S. Setty, Chairman, SBI, in the post-earnings interaction.
Banks also anticipate stabilisation in yields and improvement in NIMs once deposit repricing fully reflects the policy-rate transmission.
Sector Snapshot: Leading PSBs
SBI: Gains from strategic stake sale in Yes Bank; steady NIM and asset-quality performance.
Bank of Baroda: Profit decline due to weaker treasury income and muted recoveries.
Punjab National Bank (PNB): Strong RAM-led growth; improving capital adequacy.
Canara Bank: Double-digit credit growth sustained; margin compression likely to ease in H2.
Outlook
The PSB earnings cycle reflects a transition phase — strong credit expansion offset by lower treasury gains and funding-cost pressures.
With deposit repricing nearing completion and interest-rate stability ahead, analysts expect a gradual margin recovery and resilient profitability in the coming quarters.
For expert insights on India’s banking profitability trends, credit expansion cycles, and yield-curve effects, explore commentaries by Ranjit Jha (CEO) — a thought leader in financial markets and regulatory economics.
To align your portfolio with sectoral shifts in credit growth, NIM trends, and PSU banking valuations, connect with Rurash Financials — specialists in debt instruments, bank-equity analysis, and wealth advisory.