Indian banks' earnings growth may decline in FY26

Earnings growth for Indian banks may hit a low point in the fiscal year 2026, according to a report from Motilal Oswal. The firm expects this decline due to slow economic growth and weak credit demand. Private banks are projected to see earnings growth slow to 11%, while public sector banks may grow only 8% annually. The report highlighted a significant slowdown in credit growth, decreasing to 11% compared to the average of 16% in previous years. This decline is tied to challenging economic conditions and an expected sluggish recovery in credit for FY26. The report suggests that credit growth could stabilize around 12.5% next year, but competition for deposits will remain strong. Motilal Oswal noted that banks are facing pressure on their profit margins. This is due to a reversal in the repo rate cycle and the limited ability to reduce deposit rates. Issues like rising loan defaults, especially among mid-sized banks involved in unsecured loans, are likely to increase expenses for provisions. For private sector banks, earnings growth is forecasted to average 14% from FY25 to FY27, but may dip to 11% in FY26. Public sector banks are expected to see their earnings growth lag behind loan growth. Their earnings growth may drop to 8% annually, down significantly from 38% in the previous period. Motilal Oswal believes large-cap banks are the best option, as they have shown stronger financial stability amid economic uncertainties. The report favors banks like ICICI Bank, HDFC Bank, State Bank of India, Kotak Mahindra Bank, Federal Bank, and AU Small Finance Bank due to their favorable earnings outlook.