New Delhi, June 29

India's banking sector is poised for a sharp rebound in profitability in FY27, supported by stable net interest margins (NIMs), healthy credit growth and contained asset quality risks, according to a sector report by YES Securities released here on Monday.

After a subdued FY26, the brokerage expects profit after tax (PAT) growth for its banking coverage universe to recover strongly in FY27, aided by an improvement in net interest income (NII) and sustained loan demand across corporate, MSME and retail segments.

The report forecasts NII growth to accelerate to 16.1 per cent in FY27, up from 5.3 per cent in FY26, while PAT growth is expected to improve from 6.4 per cent in FY26 to 14.2 per cent in FY27. Profit growth is projected to remain robust in the following two years as well.

According to the report, net interest margins are likely to remain broadly stable despite multiple moving parts, including deposit repricing, liquidity conditions and changes in benchmark lending rates.

The brokerage noted that the Reserve Bank of India's recent push to attract Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits has helped improve liquidity conditions and ease wholesale deposit costs. Certificate of Deposit (CD) rates have already begun softening following the RBI's move, reducing funding pressure on banks.

The report also said the central bank's rate-cut cycle has effectively ended since December 2025 amid rising inflation expectations. While mild policy rate hikes cannot be ruled out, any increase is expected to be limited and unlikely to derail credit demand or banking sector margins.

Credit growth has strengthened to around 17 per cent, driven by improved corporate lending alongside sustained momentum in MSME and retail loans. While system-wide credit growth could moderate somewhat during the year, YES Securities expects it to remain in the low-to-mid teens, supported by stronger corporate borrowing from banks.
The brokerage observed that direct bank lending has become increasingly attractive relative to debt capital markets as the gap between banks' Marginal Cost of Funds-based Lending Rate (MCLR) and AA-rated corporate bond yields has nearly disappeared.

On asset quality, the report expects credit costs to remain broadly stable in FY27 and does not foresee any significant deterioration despite external risks such as geopolitical tensions, weather-related disruptions and global trade uncertainties.

It said stress in unsecured lending has eased compared with earlier periods, although some pressure may persist due to slower nominal GDP growth and potential weather-related impacts on microfinance and agricultural lending. However, no major build-up in bad loans is anticipated.

The report added that FY27 would be the final year before the implementation of the Expected Credit Loss (ECL) provisioning framework and does not expect the transition to trigger any material one-time shock.

Reflecting its preference for stronger lenders, YES Securities has shifted its focus over the past year towards private sector banks while continuing to favour select public sector banks.

Its preferred banking stocks, in order of investment preference, are Bank of Baroda, HDFC Bank, Kotak Mahindra Bank, Axis Bank, ICICI Bank and State Bank of India, with Bank of Baroda and HDFC Bank identified as its highest-conviction large-cap picks.

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