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Sector earnings to record 15% CAGR over FY26-28E, led by private banks

* Credit growth remained strong at 18.8% YoY; mid-sized private banks likely to lead: Systemic credit growth remained healthy at 18.8% as of 15th Sep’26, driven by:

1) sustained retail demand and higher utilization levels by MSME borrowers

2) healthy corporate borrowings with bond yields being elevated

3) higher-than-expected FCNR(B) flows of USD133b, supporting the growth momentum. We expect FY27E credit growth to settle around 15.5%. The higher loan growth is also expected to be a function of high leverage provided by overseas/GIFT City branches of respective banks. Across our coverage, we expect banks to report wide swings in loan growth ranging from 3.1% to 14% QoQ (ICICIBC, IDFCFB, and RBK to post robust sequential growth; details inside).

* Deposit growth surged to 17% YoY; CD ratio cools off to 80.8%: System deposit growth picked up from 11-12% to 17% YoY with strong FCNR(B) inflows of USD133b, which accounted for ~4.5% of system deposits. The CD ratio has thus eased from a peak of 83.4% to 80.8%. While FCNR(B) deposits have supported the deposit mobilization, banks continue to face challenges in mobilizing lowcost deposits. We expect term deposit (TD) rates to remain broadly sticky (with an upside bias) as banks strive to sustain deposit accretion. Across our coverage universe, we expect deposit growth in the range of 2.8-18.6% QoQ depending on the quantum of FCNR(B) deposits (RBK being the highest, details inside).

* NIMs to contract for private banks; PSBs to report resilient margins: NIMs for private banks are expected to be adversely impacted by rapid business growth owing to FCNR(B) inflows and the leverage provided by the banks against the same. NIMs are expected to gradually improve as banks deploy the funds for lending and retire high-cost liabilities. Large private banks are likely to witness an adverse impact of 8-20bp. Among mid-sized private banks, RBK would see a NIM expansion with the full-quarter impact of Emirates NBD capital infusion, while IDFCFB would report a sharper sequential decline. For PSU banks, NIMs are likely to be range-bound owing to the lower proportion of FCNR(B) deposits mobilized as a % of overall deposits and the focus on retiring high-cost liabilities.

* Asset quality outlook benign; credit cost to remain in control: Most banks have indicated that stress across secured and unsecured segments remains controlled and thus slippages, and credit costs are expected to remain steady. However, we remain watchful of the adverse impact of the uncertain macro environment on domestic business growth and credit quality, alongside a below-normal monsoon. Estimate ~15% PAT CAGR over FY26-28: For 2QFY27E, we estimate NII for our banking coverage universe to improve 11.9% YoY/2.2% QoQ and PPoP to rise 4.1% QoQ. We estimate private banks’ PAT to grow 24.0% YoY/1.7% QoQ and PSU banks’ PAT to grow 27% YoY/ 19% QoQ. For our coverage universe, we estimate PAT to grow 25.4% YoY/9.5% QoQ. We estimate our coverage banks to deliver a 15% earnings CAGR over FY26-28, fueled by 20% CAGR for private banks. Our top picks are ICICIBC, SBIN, KMB, and AUBANK.

Private banks: 2Q earnings to grow 24% YoY (20.7% in FY27E)

* Private banks: We estimate PPoP to rise 13.7% YoY/2.4% QoQ and PAT to grow 24.0% YoY/1.7% QoQ in 2QFY27. We estimate a 20% earnings CAGR over FY26-28 for the private banks.

* Estimate NII to grow 13% YoY/2.8% QoQ: Among large private banks under our coverage, NII is estimated to grow by 8.9% YoY (up 2.5% QoQ) for HDFCB and 16.8% YoY (3.1% QoQ) for ICICIBC. AXSB’s NII is likely to grow by 8.5% YoY/1.9% QoQ, and KMB’s by 14.0% YoY/5.1% QoQ.

* NIMs are likely to dip 8-20bp owing to rapid business expansion with FCNR(B) inflows and the leverage provided against the same. However, the deployment of this surplus liquidity, and retirement of high-cost liabilities would drive steady earnings growth.

PSU banks: NIMs to remain resilient; 2Q PAT to grow 27% YoY/19% QoQ

* We estimate PSU banks’ PAT to grow 27% YoY (19% QoQ) in 2QFY27, supported by robust business growth, partly coupled with stake sale gains at SBI (SBI MF & NSE), BOB (NSE), and INBK (NSE), and normalization of BoB’s PAT.

* NIMs to remain resilient, leading to NII growth of 10.8% YoY/1.6% QoQ. Treasury gains are expected to remain muted as bond yields have remained elevated.

* Asset quality outlook stable for PSU banks, while recoveries from the write-off pool are declining. We expect benign credit costs to continue for PSU banks.

* We estimate PSU banks to report an earnings CAGR of 11% over FY26-28.

Payments/Fintech: Paytm and Pine Labs – Strong revenue and GMV growth

* SBICARDS: Loan book growth is expected to remain modest, led by mid-teens retail spending growth. Credit cost is expected to moderate, though cost ratios will remain higher. We estimate PAT to grow 60% YoY/7% QoQ to INR7.1b.

* PAYTM: Revenue from operations is expected to grow at a robust 27% YoY/7% QoQ to INR26.3b. Contribution margin is expected to remain steady at ~55.4%. GMV growth should remain strong at 32% YoY/6% QoQ to INR7.5t.

* PINE LABS: Revenue from operations is expected to grow at a robust 22% YoY/7% QoQ to INR7.9b, while contribution margin is expected to improve to 74%. GMV growth is likely to rise 13% YoY/14% QoQ to INR4.8t.

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