Banks' earnings downgrades intensify amid muted FY26: Motilal Oswal

Top banking picks for Motilal Oswal include ICICI Bank, HDFC Bank, SBI, and AU Small Finance Bank

Earnings downgrades in the Indian financial stocks are picking up pace, analysts at Motilal Oswal said, citing margin pressure and asset quality stress in unsecured segments. However, they do note that "turnaround appears within reach" in the third quarter of the current financial year (Q3FY26).

 

Earnings in the financial space have slipped into the declining territory, owing to margin pressure from high funding costs and slower loan growth, the brokerage said in a note. Banks are grappling with the transmission of rate cuts, while asset quality stress in unsecured segments continues to weigh on the near-term bottom line, it noted.  

 

 

Consensus earnings estimates for the financial year 2026-27 have witnessed broad-based downgrades over the past three and 12 months, Motilal Oswal said, adding that with private sector lenders witnessing sharper cuts. In the past 3 months, FY26 PAT estimates for private banks were cut by 4 per cent against 1 per cent for PSU banks, it said.  

 

Further, the biggest earnings downgrades have been concentrated among mid-size private banks with higher exposure to unsecured retail and MFI segments, whereas larger and more diversified banks proved more resilient. Bandhan Bank, Equitas, IDFC First Bank and RBL Bank witnessed a sharp 41-95 per cent cut in FY26 earnings over the past one year. In contrast, larger banks witnessed relatively modest downgrades, Motilal Oswal said.  

The RBI's sharp 100 basis points (bps) repo rate cut, higher credit costs, and slower loan growth have led to broad earnings downgrades in banks, with several midsize lenders seeing EPS cuts of over 10 per cent in the past three months, the report said. 

 

However, analysts at Motilal Oswal said that signs of stabilisation are emerging, citing deposit repricing and the phased CRR cut. Early improvements in unsecured retail stress, coupled with moderating credit costs, are beginning to support the outlook for a gradual recovery in margins and earnings, it added.  

 

A turnaround appears within reach, as the third quarter is likely to mark the end of the current earnings deceleration cycle, with earnings growth compared to a decline in the first and second quarters. "Banks with strong liability profiles, robust balance sheets, and prudent risk management are best positioned to navigate near-term challenges."

 

Motilal Oswal said that consensus sees FY26 as a muted year for banks, with sector PAT up just 2 per cent year-on-year (Y-o-Y) to ₹3.3 trillion, the weakest growth in years versus a 40 per cent CAGR in FY20-25, weighed by margin pressure, high credit costs, and slower loan growth.

 

Top picks for the brokerage include ICICI Bank, HDFC Bank, SBI, and AU Small Finance Bank.