Banking Earnings to Rebound, Private Banks to Lead Growth
The overall banking sector in the country is projected to witness a robust rebound in earnings of around 17 per cent during FY27–28E, supported by stronger credit expansion, margin recovery, and steady asset quality, as per a report by IIFL Capital.
The report noted that the tide is turning for banks, with earnings revisions turning positive after many quarters, indicating that the sector is approaching an inflection point.
"We believe banks' earnings are at an inflection point - following 3 per cent growth in FY26, we expect a strong rebound to 20 per cent, 11 per cent and 17 per cent CAGR for private sector banks, public sector banks and overall banks, respectively, over FY27-28E," the report stated.
The expected earnings recovery is likely to be supported by acceleration in loan growth, aided by the hardening of bond yields and relaxed focus on loan-to-deposit ratio (LDR).
The report also highlighted that cyclical recovery in net interest margins (NIMs) will play a key role, with around 50 per cent of term deposit repricing still remaining, which is expected to support profitability.
Further, stable-to-improving asset quality is expected to help reduce credit costs, which will contribute positively to overall earnings growth in the banking sector.
The report highlighted divergence between public sector banks and private sector banks in terms of core operating performance. Core pre-provision operating profit (PPOP) growth for public sector banks declined by 2 per cent year-on-year in the first nine months of FY26, while private sector banks reported a 7 per cent year-on-year growth during the same period.
It also noted that non-core income constitutes 25-35 per cent of profit before tax (PBT) for public sector banks, indicating relatively higher dependence on non-core income compared to private sector banks.
Based on these factors, the report said it prefers private sector banks over public sector banks due to stronger core operating performance and better earnings growth outlook.
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The report further stated that overall, banks are expected to report 3 per cent profit after tax (PAT) growth in FY26, before witnessing a strong rebound in the following years.
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It also noted that both domestic institutional investors (DIIs) and foreign portfolio investors (FPIs) have trimmed their overweight exposure in private sector banks. Foreign portfolio investors have net sold USD 15 billion worth of financial sector stocks over the past five years.
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Despite the recent reduction in investor exposure, the expected recovery in earnings, supported by improving margins, better asset quality and stronger loan growth, is likely to drive the banking sector's earnings rebound over FY27-28E, with private sector banks expected to lead the growth.