Private sector banks are expected to enter a stronger earnings cycle over the next 2 years, supported by improving margins, better loan growth and stable asset quality. According to a brokerage report, profit after tax (PAT) for the banking sector under coverage is projected to grow at a compounded annual rate of more than 15% during FY26–FY28, compared with less than 5% growth in FY26.
The report noted that the worst phase of net interest margin (NIM) compression appears to be over, with net interest income (NII) growth in FY27 expected to outpace loan growth.
Private banks have also started narrowing the growth gap with public sector banks (PSBs). In Q4FY26, loan growth for private banks converged with that of PSBs at around 5% sequentially, driven largely by wholesale lending and improving corporate loan economics.
System-wide credit growth accelerated to 15–16% year-on-year during the quarter, supported by wholesale credit demand and bond market substitution. However, retail loan growth, excluding gold loans, remained relatively subdued.
The report highlighted a preference for large private lenders such as Axis Bank, HDFC Bank and Kotak Mahindra Bank due to their improving growth outlook and attractive valuations.
Liquidity dynamics also shifted during the quarter. The average Liquidity Coverage Ratio (LCR) for large PSBs declined to 121% from 136% earlier in FY26, narrowing the gap with private banks operating within the 114–122% range. Analysts believe this could prompt PSBs to focus more on deposit mobilisation, potentially increasing competition for deposits or moderating future credit growth.
Private banks recorded around 8% year-on-year NII growth and nearly 20% PAT growth during Q4FY26, partly supported by IndusInd Bank returning to profitability. Excluding IndusInd Bank, PAT growth stood at around 10%.
Asset quality remained healthy across the banking sector, with gross slippages falling to multi-quarter lows. Improvement was particularly visible among private banks, while stress in unsecured retail and microfinance portfolios also continued to ease. Although PSBs witnessed a seasonal rise in SME slippages, overall asset quality remained strong.
The report added that risk-based pricing for DICGC premiums from April 2026 could help reduce operating cost pressures for large banks in FY27. It also noted that the proposed ECLGS 5.0 framework may provide support against potential stress arising from the ongoing West Asia crisis.
While risks related to crude oil prices, currency volatility and stagflation remain key concerns, the report observed that banking sector valuations remain close to or below long-term averages despite strong return ratios.
It further stated that the Reserve Bank of India’s proposed expected credit loss (ECL) norms are likely to have a manageable impact on most large banks. However, mid-sized lenders with higher exposure to non-salaried borrowers and historically higher slippages may face greater pressure on capital and credit costs during the transition.
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