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India's banking sector is expected to witness a strong earnings recovery over FY26-28, with earnings projected to grow at a compound annual growth rate (CAGR) of around 15 per cent, driven by sustained credit growth and robust net interest income (NII), according to a report by Motilal Oswal Financial Services (MOFS).The report said credit growth is expected to remain in the mid-to-high teens in FY27, with private sector banks likely to outperform public sector banks during the period.
According to MOFS, the banking sector continues to benefit from the Reserve Bank of India's (RBI) recent relief measures, higher foreign capital inflows, and continued support for both short-term and durable liquidity. The report noted that credit growth remained broad-based. Lending to the corporate and services sectors grew by 18.7 per cent and 19.1 per cent, respectively, in May 2026. It said credit to the industrial sector has accelerated from mid-single-digit growth in the first half of FY26 to the mid-teens since December 2025. The growth has been driven by higher bond yields and increased working capital requirements of large corporates, mid-sized companies, and micro, small and medium enterprises (MSMEs). However, the report pointed out that deposit growth continues to lag credit growth. Deposit growth stood at 12 per cent year-on-year and has remained in the 10-12 per cent range since the beginning of calendar year 2026. As a result, the loan-to-deposit ratio (LDR) has reached an all-time high of around 83.4 per cent. The report said the RBI's easing measures on Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits and overseas borrowings are expected to attract USD 40-50 billion in foreign exchange inflows, equivalent to around 1.5-1.8 per cent of the banking system's aggregate deposits. MOFS expects net interest margins (NIMs) to remain under pressure in the first quarter of FY27 as lending rates have remained largely unchanged over the past six months, while the full impact of earlier policy rate cuts continues to affect margins. The report added that with credit growth increasingly driven by wholesale and MSME lending, banks may face challenges in improving pricing power. Deposit rates have also remained elevated, with some mid-sized banks raising rates further during the quarter. In addition, a decline in the current account savings account (CASA) ratio across the industry is expected to increase banks' overall cost of deposits. "While we estimate a negative bias on NIMs in the near term, we remain constructive on the medium-term outlook, supported by a potential easing in borrowing costs and possible rate hikes by the end of FY27," the report said. MOFS expects the banking sector's earnings to grow at a CAGR of around 15 per cent during FY26-28, supported by a similar growth rate in net interest income. It added that private sector banks, with an expected earnings CAGR of around 20 per cent, are likely to outperform public sector banks. (ANI)
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