Key Points

The report notes that while corporate loan demand has largely been disintermediated by mutual funds and capital markets, loans to retail, agriculture and MSMEs are likely to report strong loan growth.

"Most PSU banks are likely to report strong loan growth driven by RAM (retail, agri and MSME). While corporate loan growth has been disintermediated by mutual funds and capital markets, select AAA pockets reported corporate growth." noted the report

Among leading lenders, Bank of Baroda (BoB) has guided for quarterly loan growth of about 4 per cent, while Punjab National Bank (PNB), Canara Bank, and Indian Bank expect growth of around 2.5 per cent.

The State Bank of India (SBI) is likely to post close to 3 per cent growth, whereas Union Bank of India is projected to lag behind sector averages.

On margins, the outlook indicates a moderate decline. PNB has guided for flat net interest margins (NIM) on a sequential basis, while BoB expects its reported NIM to remain stable, though core NIM may slip by seven basis points. Indian Bank's margins could decline by under 10 basis points, while Union Bank is likely to see a 6-basis-point contraction.

Canara Bank may witness higher-than-sector pressure due to lower current and savings account (CASA) ratios. SBI has indicated a likely five basis point drop in margins.

However, despite these pressures, asset quality across state-owned banks is expected to remain stable with no major slippages. SBI, BoB and Indian Bank are anticipated to see slippage ratios improve, while other lenders are projected to hold steady.

"Asset quality for state banks is likely to remain healthy with no lumpy slippage. Slippage would decrease for SBI, BoB and Indian Bank and remain flattish for others." noted the report.

The report also highlights that return on assets (RoA) sustainability at over 1 per cent remains an investor concern, but key banks are positioned to achieve this benchmark. SBI and BoB are expected to maintain RoA above 1 per cent, supported by stronger core income, while PNB could see an expansion in RoA on account of lower tax outgo.

Nuvama Research also underlined that the PSU Bank Index has outperformed the private bank index by nearly 15 per cent in the past six months, driven by stronger loan growth and asset quality performance.

On the revenue front, net interest income (NII) growth has been under pressure for both state-owned and private banks. For PSBs, NII growth was flat to negative year-on-year in the first quarter of FY26, while most private sector banks, barring HDFC Bank and ICICI Bank, managed only low single-digit growth.

- ANI