New Delhi [India], 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.
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