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Estimate ~15% EPS CAGR over F26-28E; private banks to take the lead over PSBs

* BFSI consensus earnings have started to pick up after tepid earnings growth of 6.6% YoY in FY26. We estimate banking sector earnings to clock a 15% CAGR over FY26-28, backed by steady loan growth, stable NIMs and easing credit costs (specially in unsecured segments).

* Over the past two years, consensus FY27-28 earnings estimates have been cut by ~8% over the past two years, largely driven by private banks. PSU banks have remained relatively resilient, though recent revisions indicate slight cuts. ? In the last three months, PSU banks have witnessed 3.5-5.0% reductions in FY27/FY28 earnings estimates, largely driven by sticky CoF amid rising deposit competition, NIM pressure, and higher projected credit costs due to the ECL transition. Private banks’ earnings outlook remains relatively resilient.

* MOFSL’s FY27/FY28 banking earnings estimates are broadly in line with the consensus (+1%/+2%), as we remain relatively constructive on select mid-sized private banks like RBK, DCB, Bandhan, AU, and IIB (+5% to +15%) amid expectations of better credit growth and NIM recovery. In PSU banks, our estimates for PNB, INBK and UNBK are ~2-27% above consensus but ~3% below consensus on SBI.

* We expect banking sector earnings to rebound to ~15% CAGR over FY26-28E (consensus: 14%), led by ~15% NII CAGR. Private banks with ~21% earnings CAGR are likely to outperform PSU banks with ~8% CAGR. Top ideas: ICICI, HDFCB, SBIN and AUBANK.

Sector earnings to gain traction; Improvement visible in 4QFY26 growth

* Sector earnings growth has gained momentum, with earnings expected to grow at a 15% CAGR over FY26-28E after a relatively subdued FY26 (6.6% growth). Banks have witnessed a modest decline in NIMs during FY26, driven by lower CoF, while loan growth has remained steady at ~15% YoY. Additionally, easing asset quality stress in the unsecured segment has resulted in comparatively lower credit costs than earlier anticipated. (Exhibit 3)

* Amid this easing in headwinds, we remain watchful of the evolving situation in West Asia, which could potentially lead to some stress build-up in the MSME and CV segments. However, most banks have not indicated any such signs of stress emerging within their existing portfolios so far.

* As we move into FY27, we believe there are emerging risks to CoF amid intensifying competition for deposits. We note that select mid-sized private banks have increased deposit rates across certain buckets, reinforcing our view that CoF has likely bottomed out

Risk factors: What keeps us watchful on potential earnings trajectory

* While earnings visibility continues to improve, we remain watchful of several emerging risks that could potentially impact the sector’s earnings trajectory. We believe competition for deposits is intensifying, particularly as most PSU banks have largely utilized their balance sheet liquidity and optimized their CD ratios. Consequently, rising competition for deposits could keep CoF elevated, a trend that was also reflected in management commentary across PSU banks.

* Asset quality metrics have remained resilient so far, with the sector gradually emerging from the unsecured stress cycle. However, a prolonged geopolitical conflict in West Asia could create incremental stress in select segments, particularly MSME and CV portfolios, warranting close monitoring.

* In addition, the upcoming transition to the ECL framework could lead to some normalization in credit costs across select private and PSU banks. Early estimates suggest the impact could be up to ~120bp for certain banks. While this appears manageable at present, the transitional flow-through impact of ECL on reported credit costs remains a key monitorable.

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