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* The RBI, in its recent fortnightly print, has reported a 17.7% YoY systemic credit growth. This growth has demonstrated healthy momentum since 2HFY26, boosted by GST cuts and supportive regulatory measures. Consequently, credit growth has risen to 17.7% YoY, nearing its highest level in at least the past ten years.

* The growth distribution remains broad-based, with retail growth in the mid-teens strongly supported by healthy trends in the industrial and services segments.

* PSBs have been gaining incremental market share in credit and together account for 53% of the loan mix as of Mar’26. We note that FY26 has turned out to be the second consecutive year in which PSBs have gained market share over Private banks.

* Deposit growth, while picking up, continues to lag behind credit growth, standing at 12.2% YoY as of 31st May’26. The systemic LDR remains elevated at ~83%.

* The recent RBI relief measures for FCNR (B) Deposits are expected to facilitate deposit mobilization, with anticipated forex inflows of USD40-50b. This should translate into INR4.0-4.5t in deposits (forming 1.5-1.8% of overall deposits). Further, the removal of capital gains tax in the debt markets, the introduction of new long-term G-Secs, and incentives for ECBs and overseas borrowings will further attract foreign inflows, stabilize the currency, reduce borrowing costs for banks, and improve systemic liquidity.

* While we have currently penciled in an FY27 growth of 13.6% for our banking coverage universe — with PSBs expected to grow at 12.8% YoY and private banks at 14.8% YoY — there is an upside risk to our estimates with the current growth trends.

* Overall, macroeconomic conditions are becoming more favorable for large banks, supported by improved liquidity, a near-term appreciation of the USD/INR exchange rate, potential repo rate hikes by the end of FY27, declining bond yields, increased anticipated participation in mobilizing FCNR(B) deposits, and overseas borrowings at lower funding costs.

* We expect the banking sector’s earnings to rebound with ~15% CAGR over FY26-28, fueled by ~15% CAGR in net interest income (NII). Private banks, with an anticipated earnings CAGR of ~21%, are likely to outperform PSU banks, which are expected to have an earnings CAGR of ~8%. Our top ideas are ICICIBC, HDFCB, SBIN, and AUBANK.

Credit growth in May’26 nears a decadal high; momentum to continue

* Following a largely muted CY25, bank credit experienced a surge in CY26, backed by GST rationalization and the impact of an overall 125bp rate cut by the RBI. This led to healthy credit momentum sustaining at mid-teen levels in the early parts of 2026. As per the latest fortnightly print as of 31st May’26, the credit growth has surged further to 17.7% YoY, nearing decadal high levels (adjusting for the impact of the HDFC Bank and HDFC Ltd. merger in FY23-24). The credit growth has sustained these levels despite the uncertainty in the current macro environment and rising inflationary pressures.

* This credit growth is likely to be further supported by improved deposit mobilization and enhanced systemic liquidity, resulting from recent RBI relief measures aimed at attracting higher FCNR(B) deposits and overseas borrowings, as well as the resolution of the West Asia crisis.

* Overall, we expect growth to surge further by the end of 1QFY27, gradually moderating to mid-teens as we approach 2HFY27. We have currently penciled in a growth of 13.6% for FY27 for our banking universe, and we do envisage an upside risk to our current estimates if the current growth momentum continues while macroeconomic conditions turn favorable.

Private banks likely to outpace PSBs in business growth

PSBs have been gaining incremental market share in credit and together account for 53% of the loan mix as of Mar’26. We note that FY26 has turned out to be the second consecutive year in which PSBs have gained market share over private banks. However, going forward, we estimate private banks' growth to recover, and the segment will likely outpace PSBs. This will be led by higher participation of private banks in corporate credit, business banking, and MSME lending and recovery in unsecured credit as well. We have modeled a growth of 14.8% YoY for private banks and 12.8% YoY for PSBs in our coverage universe for FY27. The C/D ratio for private banks in the MOFSL banking universe is likely to remain flat at 90% for FY27/FY28, while for PSBs, the C/D is expected to go up to 82.5% in FY28 from 79.8% in FY26.

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