Gains from treasury operations have supported the bottomline of scheduled commercial banks in the first quarter of 2025-26 (Q1FY26), even as sluggish credit demand weighed in on margins during the quarter.
Data compiled by CareEdge Ratings of 22 banks shows a 12.3 per cent year-on-year growth in pre-provision operating profits to ₹1.12 lakh crore. While the operating profit of public sector banks grew 9.4 per cent, private banks grew 14.1 per cent in Q1FY26 compared with Q1FY25.
“The treasury income of select scheduled commercial banks, as a per cent of total assets, witnessed an increase of 20 basis points, from 0.20 per cent in Q4FY25 to 0.4 per cent in Q1FY26. The sequential increase was primarily driven by mark-to-market gains on government securities supported by the softening of bond yields,” CareEdge Ratings said.
With the RBI cutting interest rates, 10-year bond yields have fallen from 6.5 per cent on April 3, 2025, to 6.3 per cent at present, leading to rising bond prices, which enabled banks to generate gains from treasury operations.
Net interest margins declined by 22 basis points year on year to 3.14 per cent during Q1FY26 due to subdued credit growth primarily in the corporate and unsecured segments. Also, a quicker reduction in lending rates compared with deposit rates has further dragged margins.
Festival hope
Scheduled commercial banks are expecting a boost in retail credit demand in the second half of the year, driven by the festive season, even as loan demand from corporate houses remains subdued.
Data from the RBI shows that as of July, credit growth was at 9.8 per cent compared with 14 per cent in the year-ago period. “A fair amount of festivals will start to kick in from August onwards. I think that mood will have a reasonable amount of impetus and that could be a good trigger as well,” said Sashidhar Jagadishan, MD and CEO of HDFC Bank, at the Q1 earnings call.
Falling bond yields and rising public issues also indicate that corporate houses are diversifying their capital sources.
“There are a couple of fundamental factors in the corporate book. There are corporates having a strong cash flow position, which are de-leveraging. At the same time, good corporates are able to tap the bond market at cheaper rates,” said Debadatta Chand, MD and CEO of Bank of Baroda, at the Q1 earnings call.
“In the second half of FY26, improved liquidity conditions are expected to boost lending activity. However, due to the cumulative impact of rate cuts, banks’ net interest margins are expected to contract by 20-25 basis points over FY26. Unless there is a policy change, any benefit from a CRR (cash reserve ratio) cut is likely to occur from Q3FY25,” CareEdge Ratings said.
The firm also said that bond yields are likely to stabilise in the coming quarters, leading to the potential of additional treasury gains tapering off and putting a sharper focus on core earnings and asset quality.