New Delhi [India], June 23 (ANI): Indian banks are expected to maintain steady performance across most credit metrics in the financial year 2025-26 (FY26), even though earnings may come under pressure, according to a recent report by Fitch Ratings.

The report highlighted that Indian banks posted strong financial results in FY25 (year ended March 2025), which supports their standalone credit profiles and positions the sector for future growth.

However, Fitch cautioned that in FY26, banks' earnings might face cyclical pressures due to narrowing margins and higher credit costs.

It stated, 'We believe banks can sustain steady performance across most credit metrics in FY26, except for earnings due to cyclical pressures on margins and credit costs'.

Despite facing the slowest loan growth in four years, the sector showed improved asset quality, stronger capital buffers, and stable profitability.

As per the report data, the overall sector loan growth stood at 10.6 per cent in FY25, primarily affected by reduced lending to non-bank financial institutions and unsecured retail customers, amid tighter regulatory scrutiny and funding conditions.

Fitch expects these lending constraints to persist for at least another year, especially as private banks address asset quality concerns in their unsecured portfolios and elevated loan-to-deposit ratios (LDRs).

Nevertheless, sector loan growth is forecast to rebound to 12-13 per cent in FY26, supported by accommodative monetary policy and easing funding conditions.

To maintain the nearly 120 basis point improvement in LDRs achieved in FY25, improved deposit mobilisation will be key, especially as deposit growth has started to converge with, or even exceed, lending growth.

The report noted that impaired-loan ratios and credit costs have likely bottomed out for most banks, though some could see further improvement through write-offs of legacy bad loans. This, along with higher loan growth, could reduce the sector's impaired-loan ratio by 20 basis points in FY26.

It also added that the capital buffers in banks also improved, with the average common equity Tier 1 (CET1) ratio rising by 40 basis points to 14.2 per cent due to internal capital generation and lower risk density.

Private banks maintained a higher CET1 ratio of 16.4 per cent compared to 13 per cent for state-run banks.

However, the gap between private and state-owned banks has narrowed in recent years due to improved profitability and capital issuance at state banks.

The report concluded that while banks are likely to sustain solid performance, maintaining strong core financial metrics will be crucial for strengthening resilience against future economic shocks and supporting positive momentum in their credit profiles. (ANI)