IIFL Capital believes banks' earnings are at an “inflection point” following flattish growth in FY26. The brokerage expects a strong rebound in Private, Public Sector Undertakings as well as overall banks over FY27-28E.
The brokerage prefers
Axis Bank, ICICI Bank, HDFC Bank, State Bank of India (SBI) and
RBL. In its note, IIFL Capital said that despite an improving money multiplier, deposit growth remains weak owing to elevated government balances with the Reserve Bank of India (RBI) and outflows under the Liberalised Remittance Scheme (LRS).
However, the average current account savings account (CASA) growth run-rate has improved across private banks, ranging between 5 to 13 per cent year-on-year (Y-o-Y).
ICICI Bank has seen the highest CASA market share gains Y-o-Y, followed by
SBI and
HDFC Bank.
Here are key reasons why IIFL Capital has a bullish view on the banking sector:
Earnings rebound, valuations and flows to drive re-rating
IIFL Capital forecasts flattish earnings for banks in FY26, but expects a strong rebound in FY27–28, with earnings CAGR of 21 per cent for private banks, 14 per cent for PSUs and 18 per cent for the overall sector.
Both domestic institutional investors (DIIs) and foreign institutional investors (FIIs) have reduced their overweight positions in private banks. Foreign portfolio investors (FPIs) have been net sellers of about $15 billion in financials over the last 4.5 years, but the trend appears to be turning, according to the brokerage, with $1.5 billion of inflows into the sector in October 2025.
The brokerage believes risk–reward is attractive, given:
- High-teens earnings growth (EPS CAGR) for banks, as against 16 per cent for Nifty ex-Financials
- Reasonable valuations at 12x 1-year forward price-to-earnings (P/E), in line with the long-term average (LTA), compared to 21x for the Nifty, which is +1 standard deviation above its LTA.
Loan growth bottomed, modest recovery ahead
According to IIFL Capital, system loan growth has bottomed out, but only a modest recovery is likely. System loan growth improved to 11.2 per cent Y-o-Y, with PSUs continuing to gain market share, while HDFC Bank, ICICI Bank, Federal Bank and IndusInd Bank lost 5–35 bps of market share Y-o-Y. Corporate loan growth improved for select banks, retail loan growth is stronger for PSUs versus private banks, and SME growth is strong across the board.
The brokerage expects recent fiscal and monetary easing to aid a consumption revival and support a modest recovery in loan growth. However, it does not anticipate a sharp acceleration due to:
- A historical positive correlation between home loan growth and interest rates.
- Bond market disintermediation is driving structural corporate credit market share loss for banks (a fall of around 20 percentage points in the last decade).
- Overall system credit growth at a healthy 13 per cent Y-o-Y, as compared to 10 per cent for banks, implying a 1.3x credit multiplier.
NIM surprise in Q2; PSUs to lag private banks in recovery
IIFL Capital said net interest margins (NIMs) surprised positively in Q2, helped by better funding costs. The RBI’s ₹10-trillion durable liquidity infusion has supported faster rate transmission, with fresh weighted average lending rate (WALR) and weighted average term deposit rate (WATDR) declining 90 bps and 95 bps, respectively. Banks’ Q2 NIMs were better than expected, mainly due to funding cost improvement.
The brokerage expects the cash reserve ratio (CRR) cut to drive 7–9 bps of NIM expansion, and believes this, along with further term deposit (TD) re-pricing, should offset the impact of another potential 25 bps policy rate cut.
However, it expects PSU banks’ NIM recovery to trail private banks because of delayed marginal cost of funds-based lending rate (MCLR) cuts, down 25 bps for PSUs, as compared to 55 bps for private banks since February 2025. Fee income growth is weak for Kotak Mahindra Bank, Bank of Baroda (BOB) and IndusInd Bank.
Banks curtailed operating expenses amid top-line pressure, but only HDFC Bank and Kotak Mahindra Bank delivered positive jaws.
Unsecured retail stress, ECL impact and credit cost outlook
On asset quality, IIFL Capital expects unsecured retail stress to ease, while most PSU banks face a one-time expected credit loss (ECL) hit of about 1 per cent of loans.
Overall, the net slippage ratio declined Q-o-Q and Y-o-Y for most banks (except IndusInd Bank and Federal Bank). Given ageing-related provisions on unsecured retail loans, IIFL Capital expects credit costs to rise 17 bps Y-o-Y in FY26, but improve by 8 bps Y-o-Y in FY27, supported by better unsecured retail stress and benign corporate asset quality.
 "Banks at 'inflection point': IIFL sees earnings rebound, bets on Axis, HDFC")
