Banking stocks ICICI Bank, HDFC Bank, and State Bank of India (SBI) are top invetsment ideas domestic brokerage house Motilal Oswal Financial Services (MOSL) has named to play the upcoming earnings recovery in the banking sector. These lenders are best placed to deliver superior returns as earnings momentum strengthens, it added.
As per the brokerage, Indian banks are nearing the bottom of their earnings cycle, with a meaningful turnaround expected from the second half of FY26. MOSL noted that profitability in recent quarters has been largely supported by non-core treasury gains as net interest income (NII) growth slowed sharply due to aggressive loan repricing and elevated funding costs, leading to a 1 percent year-on-year decline in NII for its coverage banks in 1QFY26.
Earnings Growth to Rebound from H2FY26
MOSL expects NII growth to accelerate from H2FY26 as deposit repricing stabilizes, loan growth picks up, and the benefits from CRR cuts begin to flow through. The brokerage projected profit after tax (PAT) growth to rebound to 9 percent YoY in H2FY26E, compared with a 4 percent YoY decline in H1FY26E. Over FY26–28E, it forecast a strong 17 percent earnings CAGR for the sector, marking the end of the multi-year earnings slowdown and setting the stage for sustained growth.
NIM Recovery to Strengthen Core Earnings
MOSL analyzed the NII trajectory under the assumption of stable net interest margins (NIMs) and found that NII would have grown by nearly 2 percent QoQ instead of the reported 1 percent decline.
“Among banks, the largest incremental benefit would have been seen by private banks such as HDFC Bank, Axis Bank, and Kotak Mahindra Bank, and PSBs like Canara Bank, SBI, and PNB,” it noted.
This analysis, MOSL said, reinforces its view that as NIMs normalize in FY27 and loan growth revives, core earnings growth will accelerate sharply.
“We continue to believe that NIMs will remain under pressure in 1H and maybe in 3QFY26, due to continued loan repricing. However, a gradual reduction in funding costs will enable margin recovery from 2H onward, translating into healthy earnings growth over FY27E,” stated the brokerage.
Falling Investment Yields Remain a Risk
MOSL flagged falling investment yields as a key watchpoint, highlighting that average yields on government securities across the 3–10-year curve have dropped by 35–50 basis points in the past six months. This could put pressure on investment income, especially for PSBs with large treasury books comprising 20–25 percent of assets. The brokerage warned that reinvestment risks may emerge as maturing securities are rolled over at lower yields, unless banks actively increase duration or shift to floating-rate bonds.
Loan Growth to Drive the Next Phase
MOSL forecast systemic loan growth at 11 percent in FY26E, rising to 12.5 percent in FY27E on the back of rising consumption demand, GST and direct tax cuts, normalization of unsecured loan delinquencies, and easing borrowing costs. The brokerage believes this pickup in credit demand will be a key driver of the next phase of earnings growth for the sector.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
