New Delhi [India], October 6 (ANI): Indian banks are likely to see a pickup in earnings momentum during the second quarter of FY27, supported by strong credit growth and stable or lower provisioning costs, even as elevated liquidity and a changing deposit mix are expected to keep pressure on net interest margins (NIMs), according to a Systematix Research report.

The brokerage expects earnings growth across its banking coverage universe to accelerate to 14.9 per cent year-on-year in 2QFY27, excluding IndusInd Bank, with advances growth and controlled credit costs providing key support.

"Margins to remain under pressure due to increased liquidity," Systematix Research said, adding that NIMs across its coverage universe are expected to remain lower or broadly stable sequentially during the quarter.

The brokerage expects average NIMs for the coverage universe to decline by around 7 basis points sequentially, largely due to higher liquidity and a greater share of term deposits, driven by strong FCNR(B) flows. The increase in the cost of deposits, coupled with pressure on yields on advances, is expected to weigh on margins across several banks.

At the same time, the underlying credit environment remains robust. Banking system advances grew 19 per cent year-on-year in August 2026, compared with 11 per cent a year earlier. Services credit expanded 24.3 per cent, while industrial credit growth accelerated to 18.2 per cent.

Deposit growth has also strengthened, with system-level deposits rising 17.3 per cent year-on-year and 6.9 per cent sequentially as of September 15, 2026, aided by strong FCNR(B) flows. The resulting credit-deposit ratio moderated to around 80.8 per cent from 83.4 per cent in June.

On asset quality, the brokerage expects conditions to remain benign. "Asset quality to remain contained," the report said, with slippages expected to remain stable or decline sequentially across most banks and credit costs broadly stable.

This is expected to provide an important cushion to profitability despite margin pressure. The report expects most banks to report year-on-year growth in profit after tax. 

The brokerage also expects fee income to support other income, although treasury income could moderate as higher government securities yields weigh on trading gains.

The report said strong advances growth, improving deposits and contained asset quality provide a constructive earnings backdrop for the banking sector, while NIM compression remains the key near-term pressure point for investors to monitor. (ANI)