Indian Banks' Q4 Earnings Show Weakening Pricing Power

Banks' Pricing Power Weakening as Yield on Advances Falls

India's largest lenders have reported a decline in the yield on advances, indicating a weakening of pricing power for loans in both retail and corporate segments, according to recent earnings disclosures.

The yield on advances is a key profitability measure that gives the average lending rate of a bank's portfolio. It is a crucial indicator of how much banks earn on their advances. A higher yield on advances ratio indicates the bank's ability to price its loans at a higher range, driven by a riskier loan mix.

Yes Bank reported a 10 basis point (bps) sequential fall in the yield on advances to 9.2 percent in the March quarter. On a year-on-year basis, the drop was more significant, falling about 90 bps from Q4FY25, when the ratio stood at 10.1 percent. For at least three fiscal years before that, the yield on advances ratio averaged nearly 10 percent for the lender.

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Similar trends have been observed in the country's top two private lenders, HDFC Bank and ICICI Bank. HDFC Bank saw a 30 bps quarter-on-quarter (QoQ) fall in the yield on advances ratio to 7.8 percent for the March quarter, its lowest in many fiscal years. Post the merger of HDFC Bank and HDFC Ltd, the ratio has averaged above 8 percent. When compared to Q4FY25, the ratio has fallen about 50 bps.

ICICI Bank posted a yield on advances ratio of 8.87 percent for Q4 Fy26, the lowest ratio since the second quarter of the fiscal year 2023, when ICICI reported a ratio of 8.63 percent. On a Q-o-Q basis, ICICI reported a 21 bps reduction from 9.08 percent in Q3FY26 and almost a 100 bps fall from the previous corresponding quarter.

The moderation in yields may suggest that banks could be moving past their pricing hegemony, even as loan growth has remained robust for all three private banks. Credit growth rose in the range of about 6 percent - 11 percent, with Yes Bank leading the pack, with a 11.1 percent growth on a year-on-year basis.

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The Reserve Bank of India (RBI) cut a cumulative of 125 basis points from February 2025 to December 2025, with the RBI governor saying that about 100 bps of transmission has happened on the deposit side, as compared to 90 bps on the lending side.

To be sure, most private banks' loans are linked with the external benchmark lending rate (EBLR) in their portfolio, which makes it easier for them to pass on any loan repricing immediately. For ICICI Bank, nearly 56 percent of its domestic loans are linked to external benchmark rates, while HDFC Bank has 70 percent of floating rate loans.

Banks are also increasingly growing in the retail space and looking to expand in the corporate lending segment. For all three banks which reported, their loans' growth for the March quarter was largely led by growth in retail and corporate loans. For HDFC Bank, the retail segment formed about 54 percent of the loan book, while for ICICI Bank and Yes Bank, the retail segment formed nearly 57 percent and 46 percent respectively.

The decline in the yield of advances has been going on for quite some time now, and analysts attribute it to the pass-through of rate cuts, which has been faster for private banks. Moreover, a shift in the loan mix has played a role.

With deposit costs remaining relatively sticky and competition for high-quality borrowers intensifying, the pressure on yields on advances is expected to persist.