New Delhi, July 6 (IANS) Strong growth in bank lending is expected to be the main driver of Indian banks’ profitability even as net interest margins remain flat or marginally lower in the first quarter of FY27, a report said on Monday.

The report from Systematix Institutional Equities said banking system advances expanded by 17.7 per cent year‑on‑year as of May 2026, compared with 9 per cent YoY growth recorded in May 2025, marking the highest annual growth rate since June 2024.

The report forecasted YoY earnings growth to accelerate in Q1FY27, at over 13.7 per cent (excluding IIB and BOB) compared to over 11.9 per cent in Q4FY26, primarily driven by strong YoY advances growth and lower provisioning costs.

Segment-wise, services was the fastest growing segment among advances at 20.4 per cent growth, led by non-bank finance companies surging 33.7 per cent.

The industrial segment accelerated to 17.5 per cent, led by micro & small industries at 26.2 per cent, while retail advances grew 15.4 per cent, including vehicle loans up 17.3 per cent and housing loans up 10.9 per cent, the report added.

“In contrast, credit card outstanding growth remained subdued at just 1.3 per cent YoY, marking its weakest growth rate in the last five quarters. For our coverage universe, we estimate aggregate advances growth of 16.1 per cent YoY and 1.7 per cent QoQ,” the report said.

Deposit growth continued to lag advances, with system‑level deposits up 12 per cent year‑on‑year as of June 15, 2026, leaving the credit‑deposit ratio near 83.4 per cent.

System-level liquidity remained largely comfortable during the quarter, with surplus liquidity prevailing across the banking system except for a brief liquidity deficit between 22 and 29 June 2026, which subsequently reversed.

The firm forecasted net interest margins to remain broadly stable or witness marginal sequential compression in Q1FY27.

The 1-year MCLR continued its downward trajectory during the quarter, while the share of EBLR-linked floating-rate loans increased to 90.5 per cent for PVBs and 53 per cent for PSBs, with the corresponding share of MCLR-linked loans declining to 8.8 per cent and 43.8 per cent, respectively.

Most banks have kept rates steady on both savings accounts and term deposits in the quarter, the report noted.

—IANS

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