Domestic brokerage Motilal Oswal Financial Services (MOFSL) believes India's banking sector could see stronger-than-expected credit growth in FY27, leading the brokerage to raise its loan growth forecast while reiterating ICICI Bank, HDFC Bank, State Bank of India (SBI), AU Small Finance Bank and RBL Bank as its top stock picks.
The brokerage has increased its FY27 credit growth estimate for its banking coverage universe to 14.6% from 13.6% earlier, above the Bloomberg consensus estimate of around 14.2%. It said supportive RBI measures, improving liquidity conditions and healthy demand across corporate and MSME lending could drive further upside to loan growth.
“We have increased our FY27 credit growth estimates for our banking coverage universe from 13.6% to 14.6%, with private banks expected to grow at 15.8% YoY and PSBs at 13.7% YoY. Our estimates are higher compared to the BBG consensus estimates of ~14.2%, and we believe there remains an upside risk to our estimates. However, we remain watchful of the evolving macro conditions, particularly the recent escalation in the West Asia crisis and crude prices,” analysts at MOFSL said.
Private Banks To Outpace PSU Lenders
MOFSL expects private banks to outperform public sector banks over the medium term, forecasting loan growth of 15.8% for private lenders in FY27, compared with 13.7% for PSU banks.
The brokerage expects the banking sector's earnings to grow at a compound annual rate of around 15% during FY26-FY28, driven by a similar pace of growth in net interest income (NII). Private banks are projected to deliver an earnings CAGR of around 20%, versus about 10% for PSU banks.
Credit Growth Remains Broad-Based
According to MOFSL, first-quarter FY27 business updates point to one of the strongest credit growth phases in the past decade, with lending momentum remaining broad-based across corporate, MSME and services segments.
Large private banks reported credit growth of 16.2% YoY, while PSU banks under the brokerage's coverage posted 15.1% growth. Mid-sized banks recorded 13.6% growth, while several smaller public sector banks and small finance banks also reported healthy loan expansion.
Within retail, gold loans continued to witness robust growth, while vehicle loans remained healthy. Credit card loan growth, however, stayed subdued.
Deposit Growth Continues To Lag
Deposit mobilisation continued to trail credit growth, resulting in higher loan-to-deposit ratios across the banking system. CASA ratios also declined across several banks during the quarter, reflecting continued funding pressure.
MOFSL expects the Reserve Bank of India's recent relaxation of norms for FCNR(B) deposits to help attract an estimated $40-50 billion in foreign currency inflows, easing liquidity pressures and supporting deposit mobilisation. The brokerage has factored in 13.8% deposit growth for FY27.
Margins May Remain Under Pressure
The brokerage expects net interest margins (NIMs) to remain under pressure during the first half of FY27 due to elevated deposit costs, a higher share of secured lending and limited pricing power.
However, it remains constructive on the medium-term outlook, citing supportive RBI liquidity measures, easing bond yields and improving macroeconomic conditions as key positives for the sector.
MOFSL's preferred banking stocks remain ICICI Bank, HDFC Bank, SBI, AU Small Finance Bank and RBL Bank.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
