The earnings of India’s banking sector are expected to register a strong rebound of 17 per cent over FY27–28E, supported by improved loan growth, recovery in margins and stable asset quality, according to a report by IIFL Capital.
The report stated that earnings revisions for banks have turned positive after several quarters, indicating that the sector may be nearing an inflection point.
It noted that after an estimated 3 per cent growth in FY26, overall banking sector earnings are projected to grow at a compounded annual growth rate (CAGR) of 17 per cent over FY27–28E. Private sector banks are expected to post a stronger CAGR of 20 per cent, while public sector banks are projected to grow at 11 per cent during the same period.
According to the report, the anticipated recovery will be driven by acceleration in loan growth, aided by hardening bond yields and a relatively relaxed focus on loan-to-deposit ratios (LDR).
A cyclical recovery in net interest margins (NIMs) is also expected to support profitability. Around 50 per cent of term deposits are yet to be repriced, which could provide further margin support in the coming quarters.
The report further stated that stable-to-improving asset quality is likely to help moderate credit costs, contributing positively to earnings growth.
However, it highlighted a divergence in core operating performance between public sector and private sector banks. Core pre-provision operating profit (PPOP) for public sector banks declined 2 per cent year-on-year during the first nine months of FY26, whereas private sector banks reported a 7 per cent year-on-year growth in the same period.
Non-core income accounts for 25–35 per cent of profit before tax (PBT) for public sector banks, indicating a relatively higher reliance on non-core earnings compared to private sector peers.
Based on these trends, the report expressed preference for private sector banks, citing stronger core operating metrics and a more favourable earnings outlook.
It also noted that overall profit after tax (PAT) growth for the banking sector is expected to remain modest at around 3 per cent in FY26, before witnessing a stronger recovery in subsequent years.
The report added that both domestic institutional investors (DIIs) and foreign portfolio investors (FPIs) have reduced their overweight positions in private sector banks. Over the past five years, FPIs have net sold approximately USD 15 billion worth of financial sector stocks.
