He expects private banks to deliver 18-20% earnings growth over the year, supported by improving profitability and lower credit costs, even as deposit costs continue to weigh on margins.
Aggarwal said the April-June quarter of 2026 (Q1FY27) marked a strong start for the sector, with several lenders reporting better-than-expected profits as bad loan slippage and provisioning declined sharply.
While net interest margins remain under pressure for many banks, he believes the worst may be over. “We believe that going forward things will kind of stabilise, and over the second half there is a possibility of some expansion in margins at the sector level, and which is where we think the earnings momentum will pick up.”
Among large banks, Motilal Oswal’s preferred picks remain ICICI Bank, HDFC Bank and State Bank of India (SBI). Aggarwal said ICICI Bank continued to stand out despite its size, delivering another earnings beat even after adjusting for one-off gains. He expects earnings at banks such as Axis Bank and Kotak Mahindra Bank to improve as credit costs normalise.
Within public sector undertaking (PSU) banks, Punjab National Bank (PNB) remains a preferred idea. Aggarwal said the bank has healthy liquidity, improving margins and one of the best slippage ratios in the sector, which should help it sustain profitability. He believes the stock still offers attractive valuations compared with other PSU banks.
Aggarwal also remains positive on mid-sized private banks, especially AU Small Finance Bank, which he expects to continue compounding at over 20% over the coming years. He also likes Federal Bank and RBL Bank, saying these lenders are well placed to benefit as sector earnings recover.
On IDFC First Bank, Aggarwal said the brokerage has become more constructive after a stronger-than-expected first quarter. The bank has guided for lower credit costs, prompting Motilal Oswal to raise its FY27 and 2027-28 (FY28) earnings estimates, although it has retained a neutral investment rating for now.
He cautioned that margin pressure has not disappeared. Deposit costs remain elevated and competition for low-cost CASA deposits continues, meaning margins could behave differently across banks. “Margin is still a variable which is not fully in control,” he said, adding that funding challenges are still influencing banks’ profitability.
Aggarwal also believes IndusInd Bank is showing signs of recovery after a difficult year. While management is targeting industry-level loan growth, Motilal Oswal expects the bank to grow its loan book by around 13-14% this year, a sharp improvement from last year’s contraction.
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Looking across the sector, Aggarwal said leadership has shifted. Mid-sized private banks and select PSU lenders have outperformed many large private banks over the past year as bank-specific challenges weighed on larger peers. “Private banking space as a whole we like more because that’s where earning growth will be like moving towards 18 to 20 run rate,” he said, adding that improving credit costs could help some banks deliver exceptionally strong earnings growth from a low base.
