In the second half of FY26, the Indian banking sector will witness profit recovery, after a muted performance in September quarterly characterized by margin pressure, moderate credit growth and a decrease in profitability in private and public credit providers, according to a research report of Motilale Oswal -Initutional Initiation.
The report emphasized that systemic credit growth, at 10.3 percent (JoJ) from September, the demand softness reflected in both retail and business segments.
Credit growth of the entire year for FY26 is projected on 11 percent (yo-y), it is expected that it will be improved to 12.5 percent in FY27, helped by lower loan costs, GST rate reductions and income tax relief. “With income that GRIP get from 2HFY26, we estimate 17.7 percent income CAGR compared to FY26-28E,” the report noted.
The report is of the opinion that banks in the private sector are expected to report a decrease of 7.3 percent (yoj) in the net profit for Q2FY26. In addition, the income with a growth of 6.7 percent, the net interest income (NII) for the segment is linked to 0.6 percent (yej), with pressure on margins as a result of the delayed impact of policy speed reductions.
The business profit is estimated at 2 percent (yo -y) and 18 percent (QOQ). “We estimate around 19.8 percent of the CAGR income compared to FY26-28th for private banks,” the report noted.
The report said that although uncovered retail stress continues to weigh, early signs of relaxation are visible. Credit costs are likely to normalize in the second half of FY26. However, it is expected to be relatively better from large private banks with diversified portfolios.
The public sector banks (PSBs) are also expected to post weaker figures, with Q2FY26 net profit seen with 7.1 percent (yoj) and 1.9 percent (QOQ). NII for the segment will probably fall 2.5 percent (yo -y). Treasury-winsts are expected to be moderate due to reach-based bond returns, while NIMs are under pressure in large PSBs.
PSU banks are expected to be the profit of 15.2 percent compared to FY26-28. “We estimate PSU banks to report income of 15.2% in FY26-28th income,” the report notes.
The report says that margins for small financial banks (SFBs) are expected to remain under pressure in Q2FY26. Despite the short -term stress, it is expected that credit costs will gradually relieve them in the second half of FY26, because stress starts to moderate in microfinance.
“The new Mfin -catch rails that are implemented in FY26 is expected to keep growth measured and at the same time help gradually improve activa quality,” the report noted.
In general, it is estimated that the net profit of the banking sector is estimated to purchase an estimated 7.2 percent (yo -yo) in Q2FY26. With deposits of the deposit, a phased CRR reduction and the relief of the financing costs, the margins are expected to be expected in the coming quarters. The profit traction is expected to get a momentum of 2HFY26, the report estimates a strong profit of 17.7 percent CAGR compared to FY26-28.
Published on October 2, 2025
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