The profitability of Indian banks will come under pressure in the current financial year amid slowing loan growth and tariffs-led trade uncertainties, prompting dividend payouts to shrink after rising for the last few years.

The top 12 banks are estimated to shrink their aggregate dividend payouts by 4.2% to $5.98 billion in FY26, according to a report by S&P Global Market Intelligence.

The aggregate dividend payout among these banks was at $6.24 billion in FY25, an increase of 15.3% over the previous fiscal. During the two fiscals ended 31 March 2023 and 2024, banks’ combined dividend stood at $4.09 billion and $5.41 billion.   

“The expected decline in dividend payouts is rooted in a confluence of margin and profitability headwinds," said Tusharika Aggarwal, equity analyst at Market Intelligence.

Dividend cuts in banks

Major banks, including India’s largest private sector lender HDFC Bank and Bank of Baroda, are expected to cut dividend per share for the first time in at least four years. Bucking this trend, however, will be State Bank of India (SBI), ICICI Bank, Union Bank of India and AU Small Finance Bank (SFB).

HDFC Bank's dividend per share is projected to fall to Rs 8.25 in FY26, from Rs 11 in the previous year, according to S&P estimates. State-run Bank of Baroda may cut its dividend to Rs 7.90 per share from Rs 8.35.

The dividend distribution for Canara Bank may trim to Rs 3.90 per share from Rs 4 and Punjab National Bank’s to Rs 2.60 per share from Rs 2.90.

Bucking the trend

SBI, the country’s largest bank, is estimated to see a marginal rise in dividend per share to Rs 16 from Rs 15.90, while private lender ICICI Bank may raise it to Rs 12 from Rs 11. Similarly, state-owned Union Bank of India is expected to increase its dividend per share to Rs 4.80 from Rs 4.75 and AU SFB to Rs 1.45 per share from Re 1, according to the estimates.

Dividends staying flat 

Two private lenders, Kotak Mahindra Bank and Axis Bank, are likely to keep their dividends at the same level during this period. While Kotak is estimated to maintain its dividend per share at Rs 2.50, for Axis Bank it is to flatten at Re 1.

Falling profits

Bank profitability expectations for FY26 have been dampened by trade uncertainties, compression in net interest margins (NIM) due to rate cuts, elevated competition for deposit funds, weaker credit growth amid subdued demand, the Reserve Bank of India's (RBI) checks on unsecured lending and a cautious economic backdrop. 

In this fiscal’s first quarter ended June, India's biggest banks reported slower profit growth, indicating that lenders may struggle to maintain earnings momentum during the rest of the fiscal year.

The momentum in the credit system has shifted. Credit growth at scheduled commercial banks slowed noticeably this year with personal loans being the primary driver, according to the RBI’s monthly bulletin.

"With faster monetary policy transmission to money markets, large corporates have increasingly turned to market-based instruments such as commercial paper and corporate bonds for funding, thereby reducing the demand for bank credit," the central bank noted. The RBI has reduced its key policy repurchase rate by 100 basis points since February.

Bank profitability is also going to be impacted due to US President Donald Trump’s imposition of 50% tariffs on Indian goods, the highest among major global economies. In a bid to boost domestic consumption, the government has cut the Goods and Services Tax (GST) on most items.

"It's shaping up to be another challenging yet intriguing year for forecasting payouts in the Indian banking sector, given the shifting momentum in the credit system," Aggarwal said.