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Banking Sector Earnings to Grow 16% Annually Through FY28: Report

A report by Motilal Oswal Financial Services maintains a positive outlook for the banking sector, forecasting a 16% earnings CAGR from FY26 to FY28. The recovery is expected to be driven by resilient net interest margins, a significant improvement in asset quality, and a pickup in loan growth. Private banks are projected to outperform with aggregate earnings growth of 21% over FY27-28. After a period of downgrades, the sector is poised for a calibrated "U-shaped" recovery supported by structural economic factors.

Key Points: Banking Sector Outlook Positive, 16% Earnings CAGR Forecast

  • 16% earnings CAGR forecast FY26-28
  • Stable margins & improving asset quality
  • Private banks to lead with 21% growth
  • "U-shaped" recovery after flat FY26
3 min read

Banking sector outlook remains positive, earnings to grow approx. 16% CAGR over FY26-28: Motilal Oswal

Motilal Oswal report forecasts a 16% earnings CAGR for banks from FY26-28, driven by stable margins, improved asset quality, and loan growth recovery.

"Sector outlook positive; Estimate earnings CAGR of approx. 16 per cent over FY27-28E - Motilal Oswal Report"

New Delhi, January 21

The outlook for the banking sector remains positive, with earnings expected to recover steadily over the medium term, supported by stable margins, improving asset quality, and a pickup in loan growth, according to a report by Motilal Oswal Financial Services.

The report estimates that the banking sector will deliver an earnings CAGR of around 16 per cent over FY26-28E, signalling a gradual but sustained recovery after a period of pressure.

It stated, "Sector outlook positive; Estimate earnings CAGR of approx. 16 per cent over FY27-28E Buoyed by resilient margin performance and improved asset quality, we have earlier raised our aggregate FY26/27 earnings estimates by approx. 3 per cent/1 per cent in 2QFY26 results, mainly led by PSU banks".

The report added that resilient margin performance and improved asset quality have supported earnings, prompting it to earlier raise its aggregate FY26 and FY27 earnings estimates by around 3 per cent and 1 per cent, respectively, after the 2QFY26 results, mainly led by public sector banks.

These estimates have been maintained in the 3QFY26 preview as well.

According to the report, private banks are expected to see stronger growth, with aggregate earnings projected to grow by 21 per cent over FY27-28.

The recovery in earnings momentum, along with better loan growth aided by factors such as GST implementation, direct tax rate cuts, and lower borrowing costs, is expected to support improved sector performance over the medium term.

It noted that BFSI earnings estimates were consistently downgraded in recent quarters due to margin pressure, weak loan growth, and elevated credit costs. However, the pace of earnings downgrades has slowed significantly in recent months, indicating that the worst may be behind for the sector.

The report highlighted that margins are now stabilising, stress in unsecured asset quality is easing and loan growth is gaining traction. These factors are expected to support a recovery in earnings growth in the coming quarters.

It expects the banking sector's earnings cycle to undergo a calibrated "U-shaped" recovery. After a largely flat FY26, the report estimates earnings growth of around 8 per cent year-on-year in FY26E, followed by a stronger recovery in FY27.

Overall, earnings are projected to grow at a CAGR of about 16 per cent over FY27-28E, broadly in line with the consensus estimate of around 15 per cent.

The report added that the improvement in earnings momentum, combined with better loan growth conditions, should help drive improved sectoral performance in FY27.

With asset quality trends improving and margins remaining stable, the banking sector is well-positioned to benefit from a gradual economic recovery and supportive structural factors in the coming years.

- ANI

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Reader Comments

P
Priya S
Positive outlook is one thing, but as a retail customer, I'm more concerned about the high processing fees and hidden charges. Will this earnings growth lead to any relief for common depositors and borrowers? The report is silent on that.
R
Rohit P
The mention of a "U-shaped" recovery is key. It shows the sector is past the worst. Private banks at 21% growth is impressive. Time to review my portfolio and maybe increase exposure to banking stocks. 📈
S
Sarah B
As someone who works in finance here in Mumbai, this aligns with what we're seeing on the ground. The easing of stress in unsecured loans and stabilising margins are very real trends. GST and tax cuts are indeed providing a tailwind.
V
Vikram M
Good analysis by Motilal Oswal. The fact that earnings downgrades have slowed is a major positive. A healthy banking sector is crucial for funding India's infrastructure and growth ambitions. Hope the loan growth benefits rural areas as well.
M
Michael C
While the report is optimistic, I'd advise caution. These are projections, and global headwinds can still impact the sector. The 'improved asset quality' needs to be watched closely, especially if there's any economic slowdown.

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