Motilal Oswal has identified ICICI Bank, HDFC Bank, State Bank of India and AU Small Finance Bank as preferred banking sector investments. According to the brokerage report, these lenders are better positioned to benefit from stable loan growth, improving profitability and relatively stronger balance sheets compared to peers. The brokerage expects banking sector earnings to rebound to ~15% CAGR over FY26-28E, with private banks projected to achieve ~21% earnings CAGR compared to ~8% CAGR for PSU banks. As reported by The Financial Express, Motilal Oswal also highlighted select mid-sized private banks including RBL Bank, DCB Bank, Bandhan Bank and IndusInd Bank where it remains more optimistic than broader market consensus.
The brokerage expects a significant divergence between private and public sector banks over the next few years. According to the report, public sector banks had delivered strong earnings growth due to better loan growth, comfortable liquidity and healthy margins. However, rising competition for deposits is increasing the Cost of Funds for PSU banks, with margins expected to remain under pressure. Motilal Oswal has reduced NII estimates for PSU banks by ~3%, with the sharpest cuts for Bank of Baroda, Punjab National Bank and Canara Bank. In contrast, private banks are expected to witness relatively stable margins with only marginal downside risk despite gradual rise in Cost of Funds.
Motilal Oswal believes some mid-sized private banks could see recovery after facing pressure over the past two years. As reported by The Financial Express, Bandhan Bank, IndusInd Bank, and AU Bank have seen earnings upgrades of ~3%, ~10-16%, and ~1% respectively. The brokerage noted that stress in unsecured retail and microfinance loan portfolios had earlier hurt earnings expectations for several mid-sized banks, but that trend may now be stabilising. However, the report cautioned that RBL Bank and IDFC First Bank have continued witnessing earnings downgrades.
According to the brokerage report, banking sector earnings growth had remained relatively subdued in FY26, with overall profit growth of around 6.6% year-on-year. However, Motilal Oswal now expects earnings momentum to improve gradually over FY26 to FY28, supported by stable loan growth, relatively steady Net Interest Margins and easing stress in unsecured lending portfolios. The report stated that asset quality concerns in unsecured loans have started easing compared to earlier expectations, reducing pressure on credit costs for several lenders. As reported by The Financial Express, the brokerage believes sector earnings growth has gained momentum, with earnings expected to grow at a 15% CAGR over FY26-28E after a relatively subdued FY26.
While remaining constructive on select banking stocks, Motilal Oswal has flagged several risks investors should monitor. According to the report, rising geopolitical tension in West Asia, increasing competition for deposits and the transition towards the Expected Credit Loss framework could impact margins and profitability for some lenders. The brokerage remains watchful of the evolving situation in West Asia, which could potentially lead to stress build-up in the MSME and commercial vehicle segments. As reported by The Financial Express, the brokerage noted that asset quality concerns in unsecured loans have started easing compared to earlier expectations, supporting the positive outlook for the banking sector recovery.
