The current results season (1QFY26) has been rather underwhelming so far. The market expectations for this quarter were already muted. The consensus estimates projected 1QFY26e Nifty50 revenue and profits to grow around 5% yoy, while the broader market earnings were expected to grow at a better 11-12% yoy rate. However, the results declared so far indicate an aggregate revenue growth less than even the nominal GDP growth of ~10%.
Besides, the 1QFY26 season reflects a patchy recovery. Select large-cap and government-driven sectors (infrastructure, defense and PLI beneficiaries) have reported decent numbers and growth, while several small and midcap, IT, consumer and media companies have reported below expectation results.
In their post results commentary, the management of IT and consumer companies in particular, have highlighted global and macro challenges they are facing, sounding cautious about near-term growth.
Banking & Financial Services and IT Services are the most critical sectors for the overall market performance, as these sectors have almost 42% of weightage in the benchmark Nifty50. Banking & Financial services alone account for about 28% weightage in the Nifty50. While the performance of the IT Services Sector is significantly influenced by global factors, banking and financial services are primarily driven by the domestic economic and market conditions. Conversely, the performance of the banking & financial sector is a strong indicator of the state of the Indian economy.
Results of the banking & financial services companies and the related management commentary indicate a challenging time for the sector. While growth in the reported profits has been decent, provisions for NPAs have seen sharp acceleration. Pressure on revenue growth and margins is also visible. The commentary on the near-term growth prospects has also been heavily guarded.
In particular the following points have been noteworthy:
· The deposit growth is slowing down. 1QFY26 deposit growth for banks is about 10% compared to 11% in the corresponding quarter last year. Notably, the deceleration in time deposits has been much sharper (9% vs 12%) whereas demand deposits have increased significantly (18% vs 6%). This datapoint could be interpreted in multiple ways. But a simpler explanation is that (i) depositors are more uncertain about their spending/investment plans; (ii) Banks have significantly lower pool available for project or long-term lending; and (iii) despite higher system liquidity, money multiplier remains poor. This is reflected in poor credit growth of 9.5% in 1QFY26 (vs 17.4% in 1QFY25), lower than the deposit growth.
· Almost all sectors have shown a slowdown in credit offtake. Farm sector (7.5% vs 21.6%), Industry (4.8% vs 9.4%), Services (8.7% vs 23.2%) and Personal loans (11.1% vs 28.7%). Some part of the slowdown could be attributed to the high base effect, but a large part could be stress (farm sector), regulatory checks (NBFCs and personal loans) and lack of demand (industry).
Sector critical for growth acceleration, e.g., infrastructure, cement, power, steel, chemicals etc. witnessed marked slowdown. Sectors benefiting from government incentives (PLI), especially electronic manufacturing, witnessed strong growth, raising questions about the sustainability of the growth (see here).
A recent comment of the finance minister about the reluctance of the corporate sector to invest surplus cash may be seen in this context.
Corporates may be reluctant to add fresh capacities due to (a) poor demand growth outlook; (b) highly uncertain policy climate (local as well as global); and (c) stricter lending standards and elevated equity market valuations, prompting promoters to raise fresh funds through equity rather than debt.
In my view, India’s banking sector is presently facing multiple challenges. From investors’ viewpoint the outlook can be summarized as follows:
· Asset quality has peaked, little scope for further improvement, recoveries of written off debt is no longer material enough to move the needle.
· The rate cycle has turned down. Loans are getting repriced instantly (about 60% loans are linked to repo) while deposit repricing may take longer. Margins may stay lower in the short term.
· No immediate trigger for sharp acceleration in credit growth.
In simpler terms, overall banking sector may not outperform the benchmark in the near term.
