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India’s banking sector may be on the cusp of a major turnaround, and Motilal Oswal Financial Services (MOSL) has identified its top contenders to ride the wave. In its latest report, the brokerage firm has spotlighted ICICI Bank, HDFC Bank, and State Bank of India (SBI) as the most promising investment ideas amid signs of an earnings revival. With the sector nearing the bottom of its multi-year earnings cycle, analysts expect a strong rebound starting in the second half of FY26.
The report comes at a time when banks are grappling with margin pressures, elevated funding costs, and slower loan growth. Yet, MOSL believes the tide is turning, and these three banking giants are best positioned to deliver superior returns as conditions stabilize.
Key Signals From The Sector
• Net interest income (NII) for coverage banks declined 1 percent year-on-year in Q1FY26 due to aggressive loan repricing and high deposit costs.
• Profitability was largely supported by non-core treasury gains, which cushioned the impact of weak core earnings.
• MOSL expects NII growth to accelerate from H2FY26 as deposit repricing settles and loan demand picks up.
• A projected 9 percent year-on-year growth in profit after tax (PAT) is expected in H2FY26, compared to a 4 percent decline in H1FY26.
This anticipated recovery is underpinned by easing funding costs, benefits from the Reserve Bank of India’s CRR cuts, and a revival in credit demand across retail and SME segments.
Why These Three Banks Stand Out
1. ICICI Bank: Known for its strong liability profile and strategic loan pricing, ICICI Bank is expected to benefit significantly from margin recovery. The bank has already shown resilience in managing asset quality and provisioning buffers, making it a top pick for investors seeking stability and growth.
2. HDFC Bank: Despite recent margin compression, HDFC Bank’s focus on retail asset expansion and deposit mix optimization positions it well for medium-term gains. The bank’s robust underwriting and low net NPA ratio continue to inspire confidence.
3. SBI: As India’s largest public sector bank, SBI is set to gain from its expansive loan book and improving asset quality. Its treasury gains have provided short-term support, while systemic loan growth and SME credit expansion are expected to drive long-term earnings.
MOSL’s analysis suggests that these banks will see the largest incremental benefit as net interest margins normalize and credit growth revives.
Sector-Wide Trends To Watch
• Systemic loan growth is projected at 11 percent in FY26, rising to 12.5 percent in FY27, driven by consumption demand, tax cuts, and easing borrowing costs.
• Investment yields on government securities have dropped by 35–50 basis points over the past six months, posing reinvestment risks for banks with large treasury books.
• Private banks are expected to outperform public sector banks in margin recovery due to better repricing models and diversified portfolios.
The brokerage also flagged the importance of duration management and floating-rate instruments to mitigate yield compression in treasury operations.
Investor Sentiment And Outlook
With the banking sector entering a recalibration phase, MOSL believes the second half of FY26 will mark the end of the earnings slowdown. The firm forecasts a 17 percent compound annual growth rate (CAGR) in earnings for the sector over FY26–28, setting the stage for sustained performance.
Retail investors and institutional players are already showing renewed interest in banking stocks, with ICICI Bank and HDFC Bank leading the charge in terms of volume and price momentum. SBI’s steady performance and dividend yield continue to attract long-term investors.
Final Word
As India’s banking sector prepares for a rebound, ICICI Bank, HDFC Bank, and SBI have emerged as the frontrunners in MOSL’s investment playbook. With macroeconomic tailwinds and strategic positioning, these lenders are poised to lead the next phase of growth. For investors seeking exposure to financials, the message is clear—bet on the banks that are built for resilience and ready for recovery.
Sources: MSN News, Financial Express, Business Today.
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