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Banking and financial services stocks are poised for improved performance, supported by an improving macro environment, healthy credit growth and a recovery in earnings, according to Motilal Oswal Financial Services Ltd's (MOFSL) latest BFSI Picks 4.0 report.

The report highlights that banking system credit growth remained robust at 17.6%, driven by broad-based momentum across corporate, retail and MSME lending. MOFSL estimates banking system credit to grow at a CAGR of 14% over FY26-28.

According to the report, earnings growth across the sector is expected to gain momentum, with private banks projected to deliver an earnings CAGR of around 21% over FY26-28, compared with approximately 8% for PSU banks. For its overall banking coverage universe, MOFSL estimates earnings growth of nearly 15% CAGR during the same period.

While banking stocks delivered mixed returns over the past 12 months, the report expects performance to improve going forward as management commentary turns constructive and credit demand remains healthy. Large private banks remain MOFSL's preferred segment, supported by reasonable valuations, strong balance sheets and better growth prospects.

The report notes that mid-sized private banks outperformed larger peers over the past year, with RBL Bank, South Indian Bank, Federal Bank, City Union Bank and Karur Vysya Bank emerging among the strongest performers.

MOFSL's BFSI model portfolio has also demonstrated resilience amid a volatile macro environment marked by tariff disruptions, geopolitical tensions, crude price spikes and currency pressures. Since inception, the portfolio has delivered market-cap weighted returns of approximately 25%, outperforming the Nifty Financials Index return of 10% and the Nifty-50 return of 5% over the corresponding period.

Maintaining a balanced yet constructive stance on the sector, the report states that improving earnings visibility, steady credit expansion and supportive management commentary are expected to remain key drivers of BFSI sector performance over the medium term.

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