India’s banking sector is set for a robust second quarter in fiscal year 2026, with experts like Ashwini Agarwal highlighting positive trends in loan growth and credit costs. This outlook comes as banks report steady advances amid easing liquidity and reviving consumer demand, potentially driving earnings higher starting October 2025.
Expert Views on Banking Strength
Ashwini Agarwal, founder of Demeter Advisors, shared optimism about banks and financial firms during a recent interview. He noted that reasonable valuations combined with low credit costs create a favorable environment for growth.
Agarwal pointed out that liquidity improvements are boosting loan expansions. He also mentioned that consumer sentiment appears to be picking up, especially in areas like discretionary spending.
This view aligns with broader market analysis. Analysts expect banks to show resilience despite some margin pressures, with earnings recovery projected from this quarter onward.
Recent updates from major lenders support this. For instance, several banks have reported double-digit growth in business volumes year-over-year.
Key Drivers Behind the Optimism
One major factor is the benign credit environment. Credit costs remain low, allowing banks to extend more loans without high risks.
Loan growth is another highlight. Data shows advances rising significantly, fueled by retail and corporate demand.
ECL phasing, or expected credit loss adjustments, provides additional comfort. This regulatory measure helps financial institutions manage provisions smoothly.
Consumer revival plays a role too. Spending on items like fashion, jewelry, and white goods is increasing, signaling broader economic confidence.
Here are some key trends shaping the sector:
- Credit growth expected to pick up pace in the second half of FY26.
- Deposit competitions are easing, aiding net interest margins.
- Non-banking financial companies (NBFCs) are also poised for positive updates.
Performance Highlights from Major Banks
Specific banks are leading the charge. State Bank of India lowered its deposit growth forecast but still posted strong profit rises in recent quarters.
Indian Bank reported a 12.4 percent increase in total business, reaching high figures in rupees.
Bank of India saw global business grow by 11.8 percent, with retail term deposits up 14.15 percent.
| Bank | Q2 Business Growth (YoY) | Key Metric |
|---|---|---|
| Indian Bank | 12.4% | Total business at Rs 13.98 lakh crore |
| Bank of India | 11.8% | Retail deposits up 14.15% |
| State Bank of India | Varied | Profit up 28% in prior quarter |
These figures indicate a sector-wide uptrend. Private players like ICICI Bank and HDFC Bank are favored picks amid expected improvements.
Analysts predict a 19.8 percent earnings CAGR for private banks over FY26-28.
Challenges and Future Outlook
Not everything is smooth. Net interest margins may contract slightly due to competition for deposits.
Some reports suggest muted earnings growth in Q2 FY26 from lower treasury gains.
Despite this, the overall outlook remains positive. Regulatory easing supports credit expansion, and a potential interest rate cycle turn could boost momentum.
For FY2026, experts foresee continued strength, with banking trends including AI adoption and open banking.
Agarwal believes 2025 could bring volatility but shifting dynamics might favor India.
Impact on Investors and Economy
This banking resilience benefits investors seeking stable returns. Stocks like SBI, ICICI, and HDFC are recommended amid the challenging quarter.
On the economic front, stronger banks mean better credit flow to businesses and consumers, aiding recovery.
Consumer sentiment revival could extend beyond short-term boosts, supporting retail and service sectors.
Investors should watch upcoming earnings releases for detailed insights.
What do you think about the banking sector’s prospects? Share your thoughts in the comments and spread the word to fellow investors.
