New Delhi [India], 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.
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