The return on equity of several private sector banks moderated in 2025-26 as pressure on net interest margins and a fall in treasury income weighed on profitability, according to an analysis of investor presentations by banks.

Return on equity (RoE), a key profitability metric that measures earnings generated on shareholders' equity, came under pressure as banks saw compression in margins due to faster repricing of loans than deposits in a declining interest rate environment.

"The banking sector witnessed pressure on net interest margins (NIMs) in FY2026, given the faster repricing of loans than deposits in a reducing repo rate environment. This, coupled with an increase in credit cost, impacted the profitability of the banking sector as reflected in a decline in return on equity," Sachin Sachdeva, vice president and sector head - financial sector ratings at Icra, said.

Further, Sanjay Agarwal, senior director at CareEdge ratings, said due to a spike in dated government securities yields towards the end of March, the banking system has made noticeable treasury losses on an overall basis in Q4 FY26.

"Amid slower growth in deposits than credit, NIMs remain under pressure and continue to slide downwards. Therefore, on an overall basis, the overall profits of the banking system remain range-bound, resulting in a decline in RoA and RoE," Agarwal said.

Among major private lenders, HDFC Bank's RoE declined marginally to 14.3 per cent in FY26 from 14.6 per cent in FY25 and 16.1 per cent in FY24, according to the PTI's analysis of investor presentations of banks.

During the March quarter, the bank's standalone NIM of the largest private sector lender moderated to 3.38 per cent from 3.40 per cent a year ago.

In the case of the third-largest private sector lender Axis Bank, the RoE declined to 13.15 per cent in FY26 from 16.52 per cent in FY25.

Its domestic NIM declined to 3.73 per cent in the January-March quarter of FY26 from 4.08 per cent in the corresponding quarter of FY25. The bank's profit after tax (PAT) also declined to Rs 24,457 crore in FY26 from Rs 26,373 crore in FY25.

Second largest private sector lender ICICI Bank's standalone RoE moderated to 16 per cent in FY26 against 17.9 per cent in FY25, while its NIM eased to 4.32 per cent in the March quarter from 4.41 per cent a year ago.

Kotak Mahindra Bank's return ratio slipped to 11.08 per cent in FY26 from 12.57 per cent a year earlier, while its NIM declined to 4.67 per cent in the fourth quarter from 4.97 per cent in the year-ago period.

South Indian Bank reported a marginal decline in RoE to 12.76 per cent in FY26 from 12.90 per cent in FY25, with NIM moderating to 2.95 per cent in the March quarter from 3.21 per cent in the year-ago period.

Bandhan Bank saw a sharper drop in RoE to 4.8 per cent in FY26 from 11.6 per cent in FY25, while its interest margin fell to 6.2 per cent in the fourth quarter from 6.7 per cent a year ago.

Sachdeva expects return indicators to remain under pressure in FY27 as well, amid continued challenges in mobilising deposits at finer rates and a likely rise in slippages and credit costs due to prevailing geopolitical uncertainties.

"With the persisting challenges in attracting deposits at finer rates and the expected increase in slippages and credit cost amid the current uncertain geopolitical environment, the return indicators are likely to witness a slight reduction in FY2027," he said.

However, internal accruals of banks are expected to remain comfortable enough to support anticipated growth requirements, he added.

Published on May 21, 2026