Banking sector to see 17.7 CAGR profit over FY26-28, earnings recovery expected from Q2 FY26: Report

The Indian banking sector is poised for an earnings rebound in the second half of FY26 following a muted second quarter, where private and public lenders faced margin pressure, slower credit growth, and declining profitability according to Motilal Oswal Institutional Equities’ research report.

Systemic credit growth softened to 10.3% year-on-year by September 2025, reflecting weak demand across both retail and corporate segments. The report projects FY26 full-year credit expansion at 11% YoY, with a subsequent improvement to 12.5% in FY27, supported by lower interest rates, GST reductions, and income tax relief policies. “We expect earnings momentum to accelerate from 2HFY26, forecasting a 17.7% earnings CAGR over FY26-28,” the analysis stated.

Private sector banks covered in the study are anticipated to report a 7.3% YoY net profit contraction in Q2FY26, with a 6.7% sequential decline. Net Interest Income (NII) is estimated at 0.6% YoY growth as the lagged impact of rate cuts weighs on margins. Operating profit is expected to fall 2% YoY and 18% quarter-on-quarter. The report projects private banks to deliver approximately 19.8% earnings CAGR over the FY26-28 period.

While stress from unsecured retail loans persists, the analysis noted early signs of moderation. Credit costs are expected to normalize during 2HFY26, with larger private banks benefiting from diversified loan portfolios.

Public sector banks (PSBs) are projected to report a 7.1% YoY and 1.9% QoQ decline in Q2FY26 net profit. NII for the sector may decline 2.5% YoY, with treasury gains moderating due to stable bond yields and margin compression continuing. The report estimates a 15.2% earnings CAGR for PSBs over FY26-28.

Small Finance Banks (SFBs) also face continued margin pressure in Q2FY26, though their credit costs are expected to gradually ease as the asset quality of the microfinance sector stabilizes. “New MFIN regulatory guidelines implemented in FY26 should help maintain balanced growth while supporting asset quality improvement,” the report noted.

Overall banking sector earnings may decline 7.2% YoY in Q2FY26, but the report anticipates a margin recovery in subsequent quarters. Key factors driving improvement include the completion of deposit repricing, a phased CRR reduction, and easing funding costs. With earnings momentum building from 2HFY26, the sector is projected to deliver 17.7% profit CAGR through FY26-28.

Published on October 2, 2025