According to a recent report by IIFL Capital, India's banking sector is coming to a decisive inflection point, with earnings expected to bounce substantially in FY27-28 following a period of slow growth.

The report suggests that banks are likely to experience a significant revival after "flattish" earnings in FY26, particularly in the private sector. 

This resurgence is driven by improved loan growth dynamics, a cyclical recovery in net interest margins (NIMs), and lessening stress in unsecured retail portfolios, states ANI.

Private bank earnings are expected to expand at a solid 21 per cent Compound Annual Growth Rate (CAGR) over FY27-28, while public-sector banks (PSBs) are expected to achieve a 14 per cent CAGR. 

At the aggregate level, the industry is expected to grow at an 18 per cent CAGR, indicating a significant turnaround from the subdued profitability seen in FY26.

The bottoming out of loan growth has been a major driver of this rise. The research observes that, while credit expansion has shown early signs of stabilisation, the rebound will most likely be modest rather than rapid.

Much of this recovery is likely to come from a rebound in consumption demand, which has been aided by recent fiscal and monetary easing.

However, structural issues such as bond-market disintermediation and the susceptibility of house loan demand to lower interest rates will limit overall credit expansion, says the report. 

The second factor is a cyclical improvement in net interest margins (NIMs). Due to actions by the Reserve Bank of India, banks could see a 7-9 bps expansion in NIMs. However, state-run banks will experience a slower recovery than private banks, the report adds.

Finally, profitability will be helped by an easing of asset-quality pressures. Stress levels in unsecured retail products, like personal loans and credit cards, are cooling, while corporate asset quality remains benign.

Large private banks, in particular, bear less MSME-related risks, which helps keep credit costs low. Even though provisioning may increase modestly in FY26 owing to ageing-related requirements, credit costs are expected to drop by 8 basis points in FY27 as slippages decline.