Banking Sector Earnings to Grow 15% CAGR Over FY26-28, Private Banks to Outpace PSU Lenders: MOFSL

Key Takeaways

• Motilal Oswal Financial Services projects India’s banking sector earnings will grow at 15% CAGR over FY26-28, with private banks at 21% CAGR versus 8% for PSU banks.
   
• This follows a relatively subdued FY26, where stress in unsecured retail and MSME portfolios had weighed on lender profitability before easing recently.

What Is Driving the Banking Sector’s Earnings Recovery Through FY28?

Motilal Oswal Financial Services expects India’s banking sector earnings to accelerate to about 15% CAGR over FY26-28, a sharp pickup from a subdued FY26. The brokerage named ICICI Bank, HDFC Bank, State Bank of India, and AU Small Finance Bank as its top picks. Stabilising net interest margins and healthy credit demand are the 2 main reasons behind this recovery. System credit growth is estimated at 14% CAGR over the same 3-year window. 

Private lenders are set to outperform their public sector peers by a wide margin. MOFSL projects private bank earnings growing at 21% CAGR, more than double the 8% CAGR expected for PSU banks over FY26-28. The brokerage said private bank margins have largely bottomed out and could improve further if interest rates rise in the second half of FY27, given their higher exposure to repo-linked loans.

How Does Stronger Bank Earnings Growth Affect Loan Access for Indian Borrowers?

This earnings recovery is not just a stock market story. It directly shapes how easily Indians can borrow. Loan growth at large private banks is being driven by corporate, retail, and MSME demand together. Stress in unsecured retail and MSME portfolios has already started easing, and improving microfinance disbursements are expected to support profitability, especially at mid-sized lenders.

For salaried borrowers, this translates into real numbers. LoansJagat data shows SBI offers personal loans up to ₹20,00,000 at rates starting from 11.45%. ICICI Bank offers up to ₹50,00,000 at 10.85% without visiting a bank branch because ICICI offers digital loans, which are approved within 24 to 48 hours. Stronger bank earnings mean these lenders have more room to compete on rates and speed.
 

What Do Analysts Say About Risks Facing PSU Banks and the Path Forward?

For State Bank of India and other PSU banks, MOFSL expects earnings growth to moderate from recent strong levels. The reason is margin pressure from loan repricing and a higher share of corporate lending on their books. Asset quality, however, remains stable, supported by limited exposure to unsecured lending and healthy provision coverage.

MOFSL also flagged that the RBI’s recent FCNR(B) deposit mobilisation measures could support funding inflows into the banking system, though large private banks may compete aggressively for these deposits. The brokerage’s suggested path forward is straightforward: as asset-quality stress eases and margins stabilise, investor sentiment toward banking stocks should improve, even as geopolitical risks and sector-specific stress pockets remain near-term concerns.

Conclusion

MOFSL’s 15% CAGR earnings forecast for FY26-28 signals a clear recovery path for Indian banks. Private lenders like ICICI and HDFC Bank are positioned to lead, while SBI and PSU peers stay steady on asset quality. For borrowers, healthier bank balance sheets should mean easier access to credit ahead.

FAQs

Why did India fall to 6th place in global GDP rankings as per the IMF’s April 2026 outlook?

India’s nominal GDP stands at $4.15 trillion, behind the United Kingdom at $4.26 trillion and Japan at $4.38 trillion. The rupee depreciation is around 11% against the dollar, it is not weaker domestic growth. India is expected to regain the fourth spot by 2027, so long-term investors needn't worry.

Can a 15% CAGR over 20 years be achieved, and where to invest to achieve the same? 

Yes, but takes both patience and smart investment. Historically, diversification in equities, index funds and small and mid-cap segments has delivered this over long economic cycles.