Banking Sector Q2FY27 Fundamental Research Outlook

India's banking sector delivered a robust Q2FY27 performance, with combined net profits of 32 listed banks rising 20.1% YoY to ₹1.16 trillion, supported by healthy NII growth, lower provisioning and improving asset quality. Aggregate Net Interest Income (NII) increased 15.5% to ₹2.44 trillion, while operating profits grew 15.4% to ₹1.81 trillion. Provisions declined 9.1% to ₹27,271 crore, supporting bottom-line growth. Asset quality improved further, with Gross NPA declining to 1.50% from 2.07% a year ago, while Net NPA fell to 0.33% from 0.46%. Credit growth remained robust, with advances increasing 23.3% YoY against deposit growth of 19.1%, highlighting strong lending momentum but also the need to monitor funding costs. Public-sector banks demonstrated resilience, reporting aggregate net profits of ₹59,367 crore, up 20% YoY, marginally exceeding private banks' ₹57,095 crore. PSBs also recorded stronger NII growth of 15.9% against 15.1% for private lenders. However, large private banks faced sequential NIM pressures, with HDFC Bank, Axis Bank and ICICI Bank reporting contractions. In contrast, SBI's domestic NIM improved 11 bps QoQ to 3.11%, while Bank of Baroda remained broadly stable. Among individual lenders, SBI remained the largest profit contributor with ₹23,038 crore, up 14.3%. Bank of Baroda's profit surged 35.8%, while Axis Bank, Kotak Mahindra Bank and ICICI Bank reported growth of 37.6%, 29.5% and 20.1%, respectively. HDFC Bank's profit grew 4.7%, while IDBI Bank declined 39.2%. Outlook: Banking sector fundamentals remain constructive, supported by strong earnings, declining NPAs and healthy credit demand. However, deposit mobilisation, funding costs and NIM sustainability will remain key monitorables. Preference should remain with banks demonstrating strong deposit franchises, stable margins and consistent asset quality improvement.