The Indian banking sector is expected to stage an earnings recovery in the second half of FY26 after a muted September quarter, according to a report by Motilal Oswal Institutional Equities. The research highlighted that lenders across private and public segments are facing pressure on margins, moderate credit growth and weaker profitability in Q2FY26.
Systemic credit growth slowed to 10.3 per cent year-on-year as of September 2025, reflecting demand softness in both retail and corporate segments. Full-year credit growth is projected at 11 per cent for FY26, improving to 12.5 per cent in FY27, aided by lower borrowing costs, GST rate cuts and income tax relief. “With earnings gaining traction from 2HFY26, we estimate 17.7 per cent earnings CAGR over FY26-28E,” the report noted.
Private Banks Face Margin Pressure
Private sector banks under coverage are estimated to report a 7.3 per cent year-on-year decline in net profit for Q2FY26, with sequential earnings down 6.7 per cent. Net interest income growth is pegged at 0.6 per cent, while operating profit is expected to fall 2 per cent year-on-year and 18 per cent quarter-on-quarter. Motilal Oswal projects a 19.8 per cent earnings CAGR for private banks over FY26-28.
While unsecured retail stress continues to weigh, the report said early signs of easing are visible. Large private banks with diversified portfolios are expected to fare relatively better, with credit costs likely to normalise from the second half of FY26.
Public Sector Banks To Post Weak Numbers
Public sector banks (PSBs) are expected to report a 7.1 per cent decline in net profit year-on-year in Q2FY26 and a 1.9 per cent fall sequentially. Net interest income for the segment is likely to shrink 2.5 per cent. Treasury gains are expected to moderate due to range-bound bond yields, while net interest margins remain under pressure across major PSBs.
PSU banks are projected to clock earnings CAGR of 15.2 per cent over FY26-28, supported by improving asset quality and normalising credit costs.
Margins for small finance banks (SFBs) are expected to stay weak in Q2FY26, though credit costs are projected to ease gradually in the second half of the fiscal as stress in microfinance moderates. The new MFIN guardrails implemented in FY26 are expected to temper growth but aid gradual improvement in asset quality.
Overall, the sector’s net profit is expected to decline 7.2 per cent year-on-year in Q2FY26. However, with deposit repricing underway, a phased CRR cut and easing funding costs, margins are projected to recover. Motilal Oswal estimates that earnings traction will accelerate from the second half of FY26, with a strong 17.7 per cent profit CAGR over FY26-28. |
