Private banks are set for 17% earnings growth in FY26-28, outpacing PSUs' 6% despite similar loan growth. A report cites private banks' stable margins and lower risks, while PSUs face pressure from wages, income, and provisioning.
Private Banks to Outperform PSUs in Earnings Growth
Private sector banks are expected to post stronger earnings growth over the next two years compared to public sector banks despite similar loan growth trends, according to a report by Antique Stock Broking.
The report stated that loan growth for both private and PSU banks is expected to converge at around 14 per cent year-on-year during FY26-28. However, Antique Stock Broking said private banks are likely to deliver significantly better earnings performance during the period due to relatively stable margins and lower earnings risks. It stated, "FY26-28E earnings growth to be higher for private banks as compared to PSUs despite loan growth convergence".
Diverging Profitability Outlook
According to the report, earnings growth for private banks is expected to remain around 17 per cent over FY26-28, compared to nearly 6 per cent growth for PSU banks during the same period. The brokerage said PSU banks are likely to face pressure on profitability from multiple factors, including weaker other income, wage revision provisions and expected credit loss provisioning.
The report noted that PSU banks may witness weaker treasury and other income in FY27 because of rising bond yields, which have already increased during the first quarter so far. It also highlighted that PSU banks could face additional pressure from wage revision provisions in FY28 along with front-loaded Expected Credit Loss (ECL) provisioning in FY27.
On the other hand, the report stated that private banks are expected to maintain FY27 Net Interest Margins (NIMs) broadly in line with or higher than FY26 exit levels due to favourable asset mix changes.
Market Valuations and Future Outlook
The report said margin performance and deposit mobilisation remained the key focus areas during the latest result season for the banking sector. According to the brokerage, market valuations are currently factoring in concerns related to higher bond yields and intense competition for deposits.
It added that future outperformance in the banking sector could depend on possible central bank rate actions and their impact on margins and loan growth. The report also noted that valuations of larger private banks are currently at decadal lows and may see an upward re-rating if expectations of earnings upgrades increase in the event of interest rate hikes.
It stated that while loan growth trends between private and PSU banks are expected to become similar over the next two years, profitability and earnings growth are likely to remain stronger for private sector lenders due to better margin stability and lower balance sheet risks.
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