Banking sector profitability is expected to remain robust in the third quarter, with falling deposit rates anticipated to offset recent policy rate cuts and support net interest margins. The Reserve Bank of India's strategic liquidity measures, combined with sustained credit demand, are positioning banks for stable performance despite ongoing challenges in deposit mobilization.

RBI's Liquidity Support Measures

The Reserve Bank of India's 100 basis point cash reserve ratio cut has been largely implemented during the third quarter, with significant impact on banking liquidity. The implementation details show substantial support for the sector:

This liquidity infusion is expected to ease funding pressures and support bank margins across the sector. One basis point represents a hundredth of a percentage point, making this a substantial monetary policy intervention.

Credit Growth Momentum

Early numbers released by banks indicate strong credit demand, with large lenders reporting growth rates above the banking system's overall performance. Key growth indicators include:

• System Credit Growth: 10-12% during the quarter
• Large Lender Performance: Above system average
• Annual Projection: Banking system credit growth expected to remain above 12% year-on-year this fiscal
• Growth Drivers: Mid-sized banks maintaining brisk pace

Analysts from Systematix Shares & Stocks, Siddharth Rajpurohit and Rishit Savla, noted that profitability is expected to improve due to sustained sequential advances growth, higher fee income, and lower credit costs.

Net Interest Margin Outlook

The net interest margin performance is expected to vary significantly across different banking institutions. Analyst Nitin Aggarwal from Motilal Oswal provided detailed projections:

The divergent outcomes reflect varying deposit cost structures and asset repricing cycles across different institutions.

Deposit Mobilization Challenges

Despite positive credit growth trends, the banking sector faces significant challenges in deposit mobilization. The loan-to-deposit ratio has reached concerning levels:

This high loan-to-deposit ratio presents systemic risks, as banks may need to either slow loan growth or increase deposit rates to improve deposit mobilization, both scenarios potentially impacting profitability.

Sector Growth Drivers

Anand Dama, head of BSFI research at Emkay Global Financial Services, highlighted specific sectors driving banking loan growth during the quarter:

• Fast-growing segments: MSMEs and mid-corporate lending
• Retail support: Gold loans and vehicle finance
• Overall impact: Sustained demand across multiple sectors

The combination of falling deposit rates, RBI's liquidity support measures, and robust credit demand across various sectors is expected to create a favorable environment for banking profitability in the third quarter, despite ongoing challenges in deposit mobilization.

Indian banks are entering the December quarter earnings season with renewed optimism after navigating a turbulent first half of FY26. Brokerages tracking the sector have identified three key positive trends: sustained credit growth, easing margin pressure, and stabilizing asset quality. These factors are expected to drive year-on-year profitability improvements, marking a potential turning point for the banking sector.

Across reports from Systematix, YES Securities, and Elara Capital, 10 banking stocks have emerged as consistent picks for the quarter ahead, spanning both private and public sector lenders.

Brokerage-Preferred Banking Stocks for Q3

Credit Growth Momentum Sustains Across Segments

The banking system continues to demonstrate robust lending growth, with advances expanding 12% year-on-year and 4.5% quarter-on-quarter as of mid-December 2025. This growth has been broad-based, with particular strength in micro and small enterprises, services, and retail loans.

Industrial credit growth has gained momentum, primarily driven by small businesses, while services lending has also accelerated. Retail credit remains steady with vehicle loans and personal loans showing faster growth rates. Notably, credit card lending has continued to slow, indicating a gradual cooling in unsecured retail stress.

Systematix Equities estimates loan growth of approximately 11.6% year-on-year for its coverage universe in Q3. Banks including HDFC Bank, Axis Bank, ICICI Bank, Bank of Baroda, Indian Bank, and SBI are expected to outperform the sector average. JM Financial anticipates strengthening credit growth momentum, led by retail, MSME, and services loans, with mid-sized banks and small finance banks showing relatively stronger sequential growth.

Deposit Challenges Persist but Liquidity Remains Manageable

While loan growth continues at a healthy pace, deposit mobilization remains challenging. System-level deposits grew 9.7% year-on-year in December, pushing the credit-deposit ratio above 81%. This dynamic has intensified competition for deposits, with banks increasingly relying on certificates of deposit and implementing selective rate increases.

Brokerages identify deposits as the key pressure point for the sector. Elara Capital highlights that slower growth in low-cost deposits and elevated credit-deposit ratios could limit liability repricing benefits in FY27. However, Q3 liquidity conditions remain comfortable, supported by surplus system liquidity and earlier CRR cuts. Larger banks with strong liability franchises are positioned favorably, with Elara noting that "liabilities could become assets in FY27."

Net Interest Margins Show Signs of Stabilization

Net interest margins are expected to remain largely stable in Q3, representing a significant improvement from the steady pressure experienced earlier in FY26. While yields on advances continue declining due to past repo rate cuts, banks are beginning to benefit from lower term deposit rates through lagged repricing of fixed-rate deposits.

Systematix expects margins to stay broadly flat sequentially, supported by CRR cuts and deposit repricing benefits. Most banks are likely to experience only marginal movements, with some reporting small declines and others showing modest improvements. JM Financial anticipates that CRR cut benefits should offset earlier rate-cut pressure in Q3, while the December repo cut impact is unlikely until Q4 or FY27.

Asset Quality Improvement and Earnings Recovery

Asset quality is showing clear signs of stabilization in Q3, with stress in unsecured lending, particularly microfinance, easing compared to earlier quarters. Slippages across most portfolios are expected to remain stable, though seasonal agricultural loan stress may cause mild increases.

YES Securities expects provisions to decline sequentially for several major banks, reflecting improved collections and reduced incremental stress. With loan growth sustaining, margins stabilizing, and credit costs improving, Q3 is positioned to mark an earnings turning point. Systematix anticipates year-on-year profitability improvements for most banks, reversing Q2 contractions. JM Financial estimates net interest income growth of approximately 4.7% year-on-year and pre-provision operating profit growth in low double digits.

According to YES Securities projections, SBI is expected to report 2% net profit growth on 7% net interest income growth, while HDFC Bank is anticipated to achieve a 12% year-on-year profit increase. The combination of sustained growth, margin defense, and asset quality stabilization positions the banking sector for a meaningful recovery in Q3 earnings.