India's banking sector is poised for a significant earnings rebound, with 17% CAGR growth expected over FY27-28E, according to an IIFL Capital report. This represents a dramatic turnaround from the modest 3% growth recorded in FY26. The report notes that the tide is turning for banks, with earnings revisions turning positive after many quarters, signaling an inflection point for the banking sector. The recovery will be driven by faster loan growth, improving net interest margins, and stable asset quality, as reported by The Hindu BusinessLine.
The earnings recovery will vary across banking segments, with private sector banks leading at 20% CAGR, public sector banks at 11% CAGR, and overall banks at 17% CAGR over FY27-28E, according to the IIFL Capital report. 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 highlights that cyclical recovery in net interest margins (NIMs) will play a key role, with around 50% of term deposit repricing still remaining, which is expected to support profitability. Overall, banks are expected to report 3% profit after tax (PAT) growth in FY26, before witnessing a strong rebound in the following years.
There is a notable divergence in core operating performance between public and private sector banks, as reported by The Hindu BusinessLine. Core pre-provision operating profit (PPOP) growth for public sector banks declined by 2% year-on-year in the first nine months of FY26, while private sector banks reported a 7% year-on-year growth during the same period. The report notes that non-core income constitutes 25-35% of profit before tax (PBT) for public sector banks, indicating relatively higher dependence on non-core income compared to private sector banks. Stable-to-improving asset quality is expected to help reduce credit costs, which will contribute positively to overall earnings growth in the banking sector.
Based on these factors, the report prefers private sector banks over public sector banks due to stronger core operating performance and better earnings growth outlook, according to The Hindu BusinessLine. The report also highlights 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 $15 billion worth of financial sector stocks over the past five years. Despite recent investor exposure reduction, 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. Recent market developments show banking stocks have shown relative outperformance even in the corrective phase of the past year-and-a-half, with 10 banking stocks having upside potential of up to 28% according to analysts.