Motilal Oswal Financial Services (MOSL) has released its latest sector outlook on Indian banks, forecasting a cautiously optimistic FY26 with expectations of a credit growth rebound in the second half. The brokerage identified ICICI Bank, HDFC Bank, and State Bank of India (SBI) as its top stock picks, citing robust fundamentals, strong loan growth, and stable asset quality.

MOSL highlighted a slowdown in systemic credit growth to 9.6% as of mid-June 2025, mainly due to cautious lending in the unsecured retail segment. However, it projects a recovery to 11.5% YoY by FY26-end. Systemic deposit growth remained moderate at 10.4% in June, with softening low-cost CASA inflows and banks trimming deposit rates in response to declining policy rates.

Net Interest Margins (NIMs) are expected to compress in H1FY26 due to lower lending rates, but should recover in H2 following a 100 bps CRR cut and improving liquidity. Asset quality remains broadly stable, though microfinance stress is a concern for mid-sized and retail-heavy lenders.

MOSL expects muted Q1FY26 earnings with PSU banks projected to grow PAT 4.8% YoY and private banks likely to see a 2.5% YoY decline. A strong earnings rebound is anticipated in H2FY26.

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Motilal Oswal Financial Services (MOSL) has released its banking sector update for FY26, maintaining a cautiously optimistic stance while highlighting signs of near-term pressure on margins and credit growth. The brokerage expects a more robust performance in the second half of FY26 as structural tailwinds emerge.

Top Picks: ICICI Bank, HDFC Bank, SBI

MOSL reaffirmed its bullish view on ICICI Bank, HDFC Bank, and SBI, attributing their strength to diversified loan portfolios, robust provisioning, and healthy deposit mobilization:

  • ICICI Bank is seen maintaining a 16% loan CAGR with NIM at 4.41% and GNPA at just 1.67%. Projected RoA/RoE: 2.3% / 17.5% by FY27.

  • HDFC Bank continues to benefit post-merger, with 14% deposit growth, improved NIM at 3.54%, and projected RoA/RoE at 1.9% / 14.7% by FY27.

  • SBI posted 12.4% loan growth in FY25, improved digital traction through YONO (88 million users), and expected RoA/RoE of 1.0% / 15.6% by FY27.

Banking Sector Q1FY26 Preview

  • Systemic credit growth decelerated to 9.6% by mid-June 2025.

  • Deposit growth held at 10.4%, though CASA inflows weakened.

  • CD ratio stands elevated at 79%, but incremental CD ratio fell to 74%.

  • Policy rate cuts have driven banks to lower SA and TD rates by 25–100 bps since April 2025.

  • NIMs to compress in H1FY26 but rebound in H2 after CRR cuts and deposit repricing.

Asset Quality and Credit Costs

MOSL expects large PSU and private banks to maintain stable credit costs, although unsecured MFI stress remains a concern for retail-focused and mid-sized lenders. Controlled provisioning is likely to support profitability among large banks.

Earnings Outlook

MOSL expects banking sector earnings to grow at 11.1% CAGR from FY25 to FY27:

  • Private banks’ PAT is projected to fall 2.5% YoY in Q1FY26.

  • PSU banks’ PAT to rise modestly by 4.8% YoY.

  • PSU banks' NII is forecast to remain flat YoY, down 1.8% QoQ.

Among small finance banks:

  • AUBANK is expected to report a 9.8% QoQ rise in PAT due to lower credit costs.

  • Equitas Bank may see a 15% YoY decline in PAT, impacted by margin pressure and provisioning.

Banking & Financial Services (BFSI)