Margins compress, defaults ticking up, top banks falter. Time to sideline Banking Stocks for now.

FY25 wrapped with strong credit growth and expanding margins. Every bank marched boldly ahead on loan books and profitability. HDFC and ICICI delivered robust earnings while Kotak and Axis maintained asset quality.
Today, Q1 FY26 results paint a very different picture. The sector faces shrinking margins, slowing loan growth, elevated slippages and surging provisions. One-time gains mask weaker performance.
The early signal is clear: Investor caution is warranted, and banking remains a high-risk play over the next two quarters.

Q1 Results: HDFC Bank

HDFC Banks reported a standalone PAT of ₹18,155 Cr., marking a gain of 12.2% YoY. Though the surge was largely driven by a one-time ₹9,000 Cr. gains from HDB Financial Services IPO. Core operational performance, however, appeared subdued.
Net Interest Income (NII) grew modestly by 5.4% to ₹31,440 Cr., while Net Interest Margins (NIM) got compressed to 3.35% from 3.46% as funding costs rose.
Provisions spiked sharply to ₹14,442 Cr. (with ₹9,000 Cr. building buffer) reflecting a cautious stance on asset quality. Fresh slippages were also elevated to ₹9,000 Cr. Gross Non-Performing Assets (GNPA) stood at 1.40%, while Net Non-Performing Assets (NNPA) stood at 0.47%, indicating slight stress in asset quality. Loan Book grew 6.7%, deposits stood at 16% YoY growth, but CASA ratio contracted from 38.2% to 33.9%. The bank announced a 1:1 bonus issue plus ₹5/share interim dividend: signals of confidence, but underlying fundamentals remain under pressure.

Q1 Results of Kotak Mahindra Bank

Kotak Mahindra Bank reported a standalone Net Profit of ₹3,282 Cr., registering a declined of 7% YoY, excluding the prior year’s one-time insurance gain. The bank’s Net Interest Income (NII) grew 6% YoY to ₹7,259 Cr., but Net Interest Margins (NIM) compressed to 4.65% compared to 5.02% last year, primarily due to rising cost of funds.
Provisions more than doubled, up 109% YoY to ₹1,209 Cr., signaling a more conservative approach towards potential credit risks. Asset quality showed marginal deterioration as Gross Non-Performing Assets (GNPA) rose to 1.48% from 1.39%, while Net Non-Performing Assets (NNPA) stayed at 0.34%. Net advances witnessed a healthy 14% growth, reaching ₹4.45 Lakh Cr., while deposits rose by around 13%.
However, CASA ratio declined to 40.9% from 43.4%, indicating a shift towards costlier term deposits. The Cost-to-income ratio stayed high at 46.2%, exerting pressure on operating efficiency. Return On Equity (ROE) moderated to 10.94%, and Capital Adequacy Ratio (CAR) remained strong at 23%, providing a solid cushion for future growth or stress absorption.

Q1 Results of Axis Bank

Axis Bank reported a standalone profit after tax (PAT) of ₹5,806 Cr., marking a 4.4% YoY decline. The bank’s Net Interest Income (NII) was flat at ₹13,560 Cr., indicating stagnation in core lending profitability. However, pre-provision operating profits grew by ~14% thanks to a 25% jump in non-interest income, showcasing strength in fee-based businesses.
On the flip side, provisions nearly doubled to ₹3,948 Cr., including ₹821 Cr. set aside due to a technical re-classification that negatively impacted slippages. Asset quality weakened slightly as Gross Non-Performing Assets (GNPA) rose to 1.57%, Net Non-Performing Assets (NNPA) stood at 0.45%. Provision Coverage Ratio (PCR) remained adequate at 71% with total provisioning cover stood strong at 138%., reflecting the bank’s conservative risk posture.
Loan growth was modest, with advances rising at around 8%, deposits growing 9% YoY. The CASA ratio was stable at 40%, indicating no significant change in the deposit mix.
Markets responded with a 6% drop in stock prices after such disappointing results and regulatory scrutiny intensified.

Q1 Results of Bajaj Finance

Bajaj Finance reported a strong performance in Q1 FY26, with a YoY rise of 22% in standalone profit after tax (PAT) to ₹4,765 Cr. Net Interest Income (NII) also surged by 21% to ₹10,227 Cr., driven by a healthy loan growth. The company’s asset under management (AUM) expanded by 25% to ₹4.41 Lakh Crore, supported by a growing customer franchise that now stands at approximately 10.65 Crore. However, loan-loss provisions also increased by 26% YoY to ₹2,210 Cr., reflecting a more cautious stance on asset quality. Gross Non-Performing Assets (GNPA) inched up to 1.03%, Net Non-Performing Assets (NNPA) rose to 0.5%, though the credit cost remained within a manageable range. Despite its impressive growth metrics, concerns about unsecured retail and vehicle-finance asset quality led to a 6% drop in stock prices after results.
The upward trend in provisions and NPAs remains a key overhang, raising red flags for the broader NBFC segment’s outlook going forward.

Way Ahead

The signs are flashing amber for India’s Banking Sector. Q1 FY26 shows homogeneous weakness; core margins are compressing as deposit costs catch up, loan growth is decelerating and slippages, especially in unsecured and retail CV Segments, are rising.
Event banks with strong capital buffers are setting aside more provisions. One-time gains have artificially cushioned profitability, but core earnings remain fragile.
Behavioral lending norms are reverting to conservative risk stance, while investor sentiment has turned risk-averse, which is quite evident by the drop in the share prices across Axis, Bajaj and Kotak Mahindra Bank. Unless margin pressures ease and slippages normalize within the next two quarters, earnings momentum will remain stalled.
For investors, banking equities offer no-margin of safety now. It’s better to monitor credit trends, margin leverage and asset quality shifts and revisit in second half of FY26, after clarity emerges.

Conclusion

Q1 FY26 earnings reveal fundamental cracks beneath the surface: shrinking margins, rising delinquencies, elevated provisions, and one-time boosts masking weak core performance. With investor confidence shaken and risks growing, the banking sector appears overheated and vulnerable.
A holding pattern is justified, better to stay sidelined and revisit only after two quarters of clearer momentum. The prudent move: sit tight, watch trends and avoid banking stocks until fundamental stabilize.

Disclaimer

The views and investment tips expressed by experts are their own and not those of this website or its management. Daily Equity advises users to check with certified experts before taking any investment decisions. This article is generated by Arjit Rajeev Garg, A SEBI Registered RA: INH000021951. This article is just for information purpose and does not promote any capital investments scheme. Readers are cautioned, do not invest solely on the basis of information provided in this article. Daily Equity is just a platform for any investments.
Investments in securities markets is subject to market risks, please read all scheme related documents carefully.
SEBI Registration or NISM Certification do not guarantee returns in markets, please consult a financial advisor before investing.