Improving margins, steady credit demand and easing stress in unsecured lending are expected to strengthen India’s banking sector over the next 2 years, with large private lenders and State Bank of India likely to drive the recovery.
According to a report by a financial services firm, banking sector earnings growth is projected to accelerate to around 15% CAGR during FY26-28 after a relatively muted FY26. ICICI Bank, HDFC Bank, State Bank of India and AU Small Finance Bank have emerged as preferred picks.
Private banks are expected to outperform public sector lenders, with earnings CAGR estimated at around 21% over FY26-28, compared with nearly 8% for PSU banks. Margins for private lenders are seen stabilising and could improve further if interest rates rise in the second half of FY27, supported by their larger share of repo-linked loans.
Loan growth across corporate, retail and MSME segments remains healthy. Pressure in unsecured retail and MSME portfolios has eased, while better microfinance disbursements and lower credit costs are likely to support profitability, especially for mid-sized banks.
For State Bank of India and other PSU banks, earnings growth is expected to moderate compared with recent years. Margins may remain under pressure due to loan repricing and a higher share of corporate lending. However, asset quality remains stable, supported by limited exposure to unsecured loans and healthy provision coverage.
The report also noted that the RBI’s recent FCNR(B) deposit mobilisation measures could improve funding inflows, although large private banks may compete aggressively to attract such deposits.
Overall banking system credit is expected to grow at a 14% CAGR over FY26-28, driven by broad-based demand across corporate, retail and MSME segments. Improving asset quality and stable net interest margins are also expected to support investor sentiment after a period of subdued performance among major private banks.
While geopolitical risks and sector-specific challenges remain, stronger earnings visibility and positive management outlooks are expected to support a recovery in banking sector valuations.
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