Motilal Oswal Financial Services (MOFSL) has issued a new report projecting that private sector banks will deliver substantially higher earnings growth compared to their public sector counterparts. This optimistic outlook for private banks coincides with India's banking sector experiencing a robust credit growth of 17.7% year-on-year as of May 31, 2026, a figure approaching a decadal peak.
Why Private Banks Are Poised for Outperformance
Despite public sector banks (PSBs) incrementally gaining market share in credit, accounting for 53% of the loan mix by March 2026, MOFSL anticipates a shift. The brokerage expects private banks to recover their growth momentum and outpace PSBs in the coming fiscal years. This projected outperformance is primarily driven by an estimated annual earnings growth of 21% for private banks, significantly higher than the 8% forecast for PSBs.
MOFSL's analysis points to increased participation by private banks in key segments such as corporate credit, business banking, and MSME lending, alongside a recovery in unsecured credit. For FY27, MOFSL models a credit growth of 14.8% year-on-year for private banks in its coverage universe, compared to 12.8% for PSBs.
MOFSL's Top Picks and Target Prices
Among its top recommendations, MOFSL includes prominent private and public sector lenders, indicating strong potential upsides. The brokerage has set the following target prices:
- ICICI Bank Ltd: Rs 1,750
- HDFC Bank Ltd: Rs 1,100
- State Bank of India Ltd (SBI): Rs 1,300
- AU Small Finance Bank Ltd (AU SFB): Rs 1,275
These targets suggest potential upsides ranging from 24% to 38% for investors.
Favorable Macroeconomic Conditions
The report highlights several macroeconomic factors contributing to a more favorable environment for large banks. These include improved systemic liquidity, a near-term appreciation of the dollar-rupee exchange rate, and the potential for repo rate hikes by the Reserve Bank of India (RBI) towards the end of FY27. Furthermore, declining bond yields and increased participation in mobilizing FCNR(B) deposits, coupled with lower funding costs for overseas borrowings, are expected to bolster bank performance.
Sustained Credit Momentum and Future Outlook
Following a relatively subdued 2025, bank credit experienced a significant surge in 2026. This was attributed to GST rationalization and the impact of an overall 125 basis points rate cut by the RBI, sustaining healthy credit momentum at mid-teen levels in early 2026. The latest figures show credit growth climbing to 17.7% year-on-year, maintaining these robust levels despite prevailing macro uncertainties and inflationary pressures.
MOFSL anticipates that improved deposit mobilization and enhanced systemic liquidity, partly due to recent RBI measures to attract FCNR(B) deposits and overseas borrowings, will further support credit growth. The resolution of the West Asia crisis is also seen as a positive factor. Overall, the brokerage expects growth to surge further by the end of 1QFY27, gradually moderating to mid-teens in the second half of FY27. MOFSL currently projects a 13.6% growth for its banking universe in FY27, noting potential upside risks if current momentum persists and macroeconomic conditions remain favorable.