Despite macroeconomic uncertainty, banking earnings are showing resilience. Aggarwal said in an interview to ET Now, “Banking earnings still look decent. Margins had declined over the past year, but with credit growth gaining traction and asset quality holding up, earnings are recovering. Stock performance will depend on investor sentiment and news flow, but we maintain a positive view on valuations relative to earnings outlook.”
PSUs, after years of losing ground, have started regaining market share. “Over FY25 and FY26, PSUs have marginally gained share. Most PSUs are now comfortable deploying liquidity and tolerating some mismatch between loans and deposits. Large PSU banks like SBI are targeting 13% to 15% loan growth, which supports their market share gains and improved earnings profile,” Aggarwal explained. This improved earnings profile and capitalization position PSUs well for the next two years.
At the same time, private banks continue to offer compelling investment opportunities. “Certain private banks were impacted by the unsecured cycle, but as credit growth picks up across retail, corporate, and SME segments, private banks will gain traction. Axis, ICICI, and HDFC are likely to report stronger growth over FY27 and beyond, supporting the case for private banks,” he said. Larger private banks are likely to see strong growth, supported by easing focus on regulatory ratios and an improving credit cycle.
Aggarwal also highlighted the strong asset quality among PSUs. “Asset quality is under control. Many PSU banks now report benign credit costs, with provisioning coverage higher than private banks. Recoveries continue and incremental slippages are manageable, keeping credit costs within control in FY27,” he noted.
Among private banks, larger institutions like ICICI and HDFC remain the preferred picks, with AU Bank favored among mid-sized banks. “Our preference is for larger private banks like ICICI and HDFC. ICICI could see 15-16% growth in FY27, while HDFC Bank expects growth ahead of the industry. Among mid-sized banks, AU Bank remains attractive,” Aggarwal added.
Non-banking financial companies (NBFCs) are being approached selectively. “We will play NBFCs for growth. Margin expansion may be limited, but vehicle financers like Shriram Finance remain attractive. Bajaj Finance has corrected, and given improving credit outlook, we may turn more positive in FY27,” he said. Competition across lending markets remains intense, keeping yields range-bound. “The lending market is very competitive. Yields will remain range-bound as banks cannot easily cut deposit rates. Margins may expand modestly, but FY27 should be better than FY26,” Aggarwal explained.
Smaller banks focused on microfinance (MFI) and MSME lending are also showing signs of normalization. “We recently upgraded Bandhan Bank after five years, expecting MFI delinquencies and credit costs to normalize. RBL Bank also has potential for industry-leading growth, though execution remains key,” he noted.
Overall, the banking sector appears poised for selective growth. PSUs are regaining market share, large private banks look set for strong credit growth, and NBFCs remain selective plays. With asset quality and margins stable, well-capitalized institutions present attractive opportunities for investors as FY27 unfolds.
