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Key Points

The Indian banking sector is currently facing margin pressures and moderate credit growth, leading to weaker quarterly performance. However, Motilal Oswal's research indicates earnings will start recovering from the second half of FY26. The report projects an impressive 17.7% compound annual growth rate in profits between FY26 and FY28. This recovery will be driven by improving credit growth, easing funding costs, and gradual normalization of credit costs across the sector.

Key Points: Indian Banking Sector 17.7% Profit Growth Expected FY26-28

  • Banking sector earnings recovery expected from second half of FY26 after current quarter declines
  • Private banks projected to deliver 19.8% profit growth CAGR over FY26-28 period
  • Public sector banks forecast to achieve 15.2% earnings CAGR despite near-term pressure
  • Credit growth expected to improve to 12.5% in FY27 supported by lower borrowing costs
  • Margin pressures to ease with deposit repricing and phased CRR cuts implementation
  • Asset quality concerns in unsecured retail showing early signs of gradual improvement
3 min read

Banking sector to see earnings recovery from Q2FY26, strong 17.7% CAGR profit expected over FY26-28: Report

Motilal Oswal report predicts banking earnings recovery from Q2FY26 with 17.7% profit CAGR over FY26-28 despite current margin pressures

"With earnings gaining traction from 2HFY26, we estimate 17.7 per cent earnings CAGR over FY26-28E - Motilal Oswal Report"

New Delhi, October 2

The Indian banking sector is set to witness earnings recovery in the second half of FY26, after a muted September quarter performance marked by margin pressure, moderate credit growth and a decline in profitability across private and public lenders, according to a research report by Motilal Oswal Institutional Equities.

The report highlighted that systemic credit growth, at 10.3 per cent (YoY) as of September reflected demand softness in both retail and corporate segments.

Full-year credit growth for FY26 is projected at 11 per cent (YoY), expected to improve to 12.5 per cent in FY27, aided by lower borrowing costs, GST rate cuts and income tax relief.

"With earnings gaining traction from 2HFY26, we estimate 17.7 per cent earnings CAGR over FY26-28E" noted the report

The report envisages that private sector banks under coverage are expected to report a 7.3 per cent (YoY) decline in net profit for Q2FY26.

Sequentially, earnings are seen down 6.7 per cent, net interest income (NII) growth for the segment is pegged at 0.6 per cent (YoY), with pressure on margins due to the lagged impact of policy rate cuts. Operating profit is estimated to fall 2 per cent (YoY) and 18 per cent (QoQ).

"We estimate approx. 19.8 per cent earnings CAGR over FY26-28E for private banks" the report noted

The report said while unsecured retail stress continues to weigh, early signs of easing are visible. Credit costs are likely to normalise in the second half of FY26.

However, large private banks with diversified portfolios are expected to fare relatively better.

Public sector banks (PSBs) too are expected to post weaker numbers, with Q2FY26 net profit seen declining 7.1 per cent (YoY) and 1.9 per cent (QoQ).

NII for the segment is likely to decline 2.5 per cent (YoY). Treasury gains are expected to moderate due to range-bound bond yields, while NIMs are under pressure across major PSBs. PSU banks are projected to clock earnings CAGR of 15.2 per cent over FY26-28.

"We estimate PSU banks to report earnings CAGR of 15.2% over FY26-28E" the report notes.

The report says margins for Small Finance Banks (SFBs) are expected to remain under pressure in Q2FY26.

However, despite near-term stress, credit costs for them are expected to ease gradually in the second half of FY26, as stress in microfinance begins to moderate.

"The new MFIN guardrails implemented in FY26 are expected to keep growth measured while aiding gradual improvement in asset quality" the report noted.

Overall, banking sector net profit is estimated to decline 7.2 per cent (YoY) in Q2FY26. However, with deposit repricing underway, a phased CRR cut and easing funding costs, margins are expected to recover in the coming quarters. Earnings traction is projected to gain momentum from 2HFY26, the report estimates a strong 17.7 per cent profit CAGR over FY26-28.

- ANI

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Reader Comments

R
Rohit P
As someone working in a private bank, I can confirm the margin pressure is real. But the report gives hope that things will improve from next year. The GST cuts and tax relief should definitely boost credit growth.
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Sarah B
While the long-term projections look good, I'm concerned about the 7.2% decline in Q2 profits. As a retail investor, I'll wait for actual Q2 results before making any investment decisions. Better safe than sorry!
A
Arjun K
The unsecured retail stress mentioned is worrying. Many people took personal loans during COVID and are struggling to repay. Banks need to be more careful with their lending practices. Good that they're implementing guardrails now.
M
Michael C
Interesting to see PSU banks projected at 15.2% CAGR while private banks at 19.8%. The gap is narrowing, which shows the reforms in public sector banks are working. Good for overall banking sector stability in India.
K
Kavya N
Hope this recovery translates to better FD rates for common people like us. Current rates are barely beating inflation. Banks should share their profits with depositors too, not just shareholders! 🙏

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