Over the weekend, several midcap banks have delivered their Q2 numbers. Brokerages have pointed out significant differences across the sector. It’s been a mixed bag so far.
While AU Small Finance Bank impressed with healthy business growth, improving margins, and strong profit prospects, IndusInd Bank faced pressure from higher provisions in its microfinance (MFI) portfolio and a slowdown in lending. IDFC First Bank, on the other hand, reported better asset quality in its MFI segment but saw net interest margin (NIM) pressure persist.
Here is a lowdown on the key banks and what brokerages make of their performance in Q2-
IndusInd Bank: Weak MFI lending but no fresh clean-up
IndusInd Bank have been mired in account discrepancy controversy for the better part of this financial year. However, the question is whether the worst is over for the bank? Motilal Oswal said IndusInd Bank reported a loss mainly because of higher provisions in its MFI portfolio. The brokerage noted that while other income dropped due to weaker treasury gains, operating expenses came in lower than expected.
The bank’s NIM fell by 14 basis points sequentially, hurt by a slowdown in MFI lending. Loan growth remained muted as the bank deliberately slowed disbursements in the MFI segment. Deposit growth was also soft, with the bank cutting back on wholesale deposits as part of its portfolio rationalisation. However, Motilal Oswal pointed out that the credit-deposit (CD) ratio stayed comfortable at 83.6%.
“Asset quality ratios improved slightly, but management remains cautious regarding the MFI book,” Motilal Oswal said in its note.
The brokerage also highlighted that the auditor of Bharat Financial Inclusion (BFIL) — IndusInd’s microfinance subsidiary — had issued a qualified report related to investigations into certain operational losses. However, Motilal Oswal clarified that “this is not material to the group’s financial results, and BFIL is taking corrective actions on the matter.”
Motilal Oswal Financial Services cut its FY27 earnings estimates for IndusInd Bank by 20%, projecting an RoA of under 1% at 0.7% and RoE of 5.8%.
AU Small Finance Bank: Improving margins
AU Small Finance Bank ticked all the boxes in its second-quarter performance. Motilal Oswal highlighted that, “NIMs surprised the street with an uptick of 5 bps,” and are expected to keep improving in the coming quarters.
Business growth remained healthy, driven by both retail and commercial segments, while credit costs are likely to improve sharply in the second half of the year. Other income and operating expenses were broadly in line with expectations but may rise slightly as the bank continues investing for future growth.
Both advances and deposits grew steadily, and analysts expect AUBANK to maintain its growth leadership in the sector. Asset quality is likely to improve as stress in the unsecured segment eases.
Motilal Oswal noted, “Multiple levers are aligning for AUBANK—margin expansion from lower CoF, credit cost normalization, and renewed traction in the unsecured segment.” Supported by its consistent balance sheet growth, the bank is expected to deliver a strong PAT CAGR of ~30% between FY25 and FY28.
Motilal Oswal expects the bank to deliver a return on assets (RoA) of 1.7% and return on equity (RoE) of 16.7% by FY27.
IDFC First Bank: Improved asset quality, NIMs under pressure
IDFC First Bank reported an improvement in its MFI segment in Q2FY26, with lower slippages and fewer SMA accounts.
The core non-MFI book (excluding the ATM service provider segment from Q1) grew 7.8% quarter-on-quarter (QoQ). The bank’s overall business growth continued to outperform peers, with loans rising 6% QoQ and deposits up 5% QoQ, even as the MFI portfolio declined.
However, the NIM fell by 12 basis points (bps) QoQ. According to Nuvama Institutional Equities, the sharper pace of decline compared to peers was because the bank has not reduced its savings account (SA) rate.
The gross credit cost also improved, coming down to 2.2% from 2.7% QoQ. The bank expects the credit cost to fall further to 1.8% in H2FY26, supported by recoveries in the MFI segment.
Nuvama said, “A savings rate cut looks unlikely as the bank prioritises improving its loan-to-deposit ratio (LDR) over short-term gains. The current SA cost of 5.85% remains cheaper than term deposits or borrowings.”