India’s banking sector appears to be entering a more constructive earnings phase after a subdued FY26, with profit growth showing signs of recovery.
India’s banking sector appears to be entering a more constructive earnings phase after a subdued FY26, with profit growth showing signs of recovery as margin pressures stabilize and credit costs begin to normalize.
Sector earnings growth, which slowed to 6.6% in FY26, is projected to rebound meaningfully over the next two years, supported by steady loan growth, resilient operating profitability, and improving asset quality trends—particularly in previously stressed unsecured retail portfolios.
A key differentiator in the current cycle is the shifting leadership within the sector. Private lenders are expected to drive the next leg of earnings growth, benefiting from relatively stable net interest margins (NIMs), healthier provision buffers, and improving trends in mid-market retail and unsecured lending.
In contrast, public sector banks, which had enjoyed a strong multi-year earnings run, are entering a moderation phase as structural liquidity advantages fade and deposit mobilization becomes more competitive.
Deposit competition is emerging as the most important near-term challenge. As balance sheet liquidity normalizes and credit-deposit ratios tighten, banks are increasingly forced to compete more aggressively for deposits, pushing up cost of funds.
This could constrain margin expansion, particularly for institutions with less pricing flexibility. While loan growth remains healthy at roughly mid-teen levels, the sustainability of spreads will be critical in determining earnings delivery.
Another important transition is the expected credit loss (ECL) framework, which could lead to some normalization in reported credit costs. While the sector appears well-capitalized enough to absorb the transition, the accounting shift introduces an additional variable into earnings visibility, especially for lenders with thinner provision buffers.
At the same time, asset quality risks appear more manageable than in prior quarters. Stress in unsecured segments has shown signs of easing, reducing concerns around elevated credit costs.
However, macro risks remain. Any prolonged geopolitical disruption, particularly in West Asia, could pressure MSME and commercial vehicle-linked portfolios, though current management commentary suggests no visible stress build-up yet.
The medium-term investment case for the banking sector remains anchored in earnings normalization rather than balance-sheet repair. With net interest income expected to remain the principal growth engine and profitability metrics improving from FY27 onward, the sector is transitioning from a defensive recovery story to a more differentiated growth narrative.
Select private lenders, particularly those with stable deposit franchises and margin resilience, appear best positioned to capture this next phase of compounding.
ICICI Bank: Target Rs 1750
ICICI Bank remains well-positioned with a strong retail and corporate franchise, backed by best-in-class asset quality, stable margins, and consistent execution. Its diversified loan mix, improving deposit franchise, and disciplined risk management support sustainable RoA-led growth over the medium term.
Performance in 4QFY26 remained strong, with PAT at INR137b (+8.5% YoY) driven by negligible provisions and steady core income. Advances grew 15.8% YoY, while deposits rose 11.4% YoY with CASA improving to 41.4%.
NIMs stayed resilient at 4.32%, and asset quality strengthened further with GNPA/NNPA at 1.4%/0.33%, reflecting strong recoveries and controlled stress. We expect ICICI Bank to sustain ~2.25% RoA over FY27–28E, supported by steady loan growth, stable margins, and low credit costs (~0.4–0.5%). Strong operating performance and improving growth traction should drive gradual rerating
AU Small Finance Bank: Target Rs 1275
AU Small Finance Bank’s outlook remains highly constructive, supported by industry-leading growth, a high-yielding asset mix, and improving asset quality trends.
Continued moderation in cost of funds, easing stress in the unsecured portfolio, and operating leverage benefits are expected to support margins and profitability, keeping the bank well-positioned for strong medium-term earnings growth.
Performance in 4QFY26 remained robust, with PAT rising 65% YoY to INR8.3b, driven by strong NII growth of 23% YoY and sharply lower provisions.
NIM expanded 24bp QoQ to 5.96%, while advances and deposits grew 25% YoY and 23% YoY, respectively. Asset quality improved further with GNPA/NNPA declining to 2.03%/0.74%, alongside lower slippages and reduced credit costs.
With sustained business momentum, margin expansion, and normalization in credit costs, we expect a PAT CAGR of 35% over FY27–28E, reinforcing our positive view.
(The author Siddhartha Khemka, Head – Research, Wealth Management, Motilal Oswal Financial Services Ltd.)
( Disclaimer : Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
