BFSI stocks set to outperform on 17.6% credit growth, earnings revival
Synopsis
Banking credit is growing at 17.6% and private banks are forecast to deliver a 21% earnings CAGR through FY28 — yet the Nifty Private Bank Index has gone nowhere in a year. Motilal Oswal's latest report argues the underperformance is a setup, not a warning sign, with improving macro and constructive management commentary poised to unlock the sector's next leg.
Key Takeaways
Banking system credit growth stands at 17.6 per cent , driven by corporate , retail , and MSME segments.
Motilal Oswal projects credit CAGR of 14 per cent over FY26–28 .
Private banks forecast to deliver earnings CAGR of ~21 per cent vs ~8 per cent for PSU banks over the same period.
The Nifty Private Bank Index was flat over the past 12 months ; mid-sized private banks outperformed large-caps.
NBFCs posted healthy Q4FY26 results on vehicle finance, gold loans, and unsecured lending; housing financiers faced margin pressure from bank competition.
Banking and financial services (BFSI) stocks are poised for improved performance over the medium term, backed by robust credit expansion, a recovering earnings cycle, and a more supportive macroeconomic backdrop, according to a report released on Wednesday, 17 June by Motilal Oswal Financial Services Ltd.
Credit Growth Remains the Backbone
Banking system credit growth held firm at 17.6 per cent, driven by broad-based momentum across corporate, retail, and MSME lending segments. Motilal Oswal projects this momentum to sustain, estimating a credit compound annual growth rate (CAGR) of 14 per cent over FY26–28 — a trajectory that underpins the sector's earnings outlook.
Private Banks Seen Outpacing PSU Peers
Earnings growth across the sector is expected to accelerate, with private banks projected to deliver an earnings CAGR of approximately 21 per cent over FY26–28, compared with roughly 8 per cent for public sector undertaking (PSU) banks. The brokerage maintained a preference for large private banks, citing reasonable valuations, strong balance sheets, and superior growth prospects.
Notably, the Nifty Private Bank Index was broadly flat over the past 12 months, weighed down by uncertain macro conditions, margin pressure, and persistent selling by foreign institutional investors (FIIs). Mid-sized private banks, however, outperformed their larger peers during the same period.
NBFCs and Housing Finance: A Mixed Picture
Non-banking financial companies (NBFCs) delivered a healthy performance in Q4FY26, supported by strong disbursement momentum across vehicle finance, gold loans, and unsecured lending segments, partly aided by GST rate cuts. Housing financiers, in contrast, continued to face competitive pressure from banks, resulting in only modest growth during the quarter.
Outlook: Constructive but Balanced
Motilal Oswal maintained a balanced yet constructive stance on the sector, stating that improving earnings visibility, steady credit expansion, and supportive management commentary are expected to remain the primary drivers of BFSI sector performance over the medium term. The firm noted that as management commentary turns more constructive and credit demand stays healthy, banking stocks are expected to deliver improved returns going forward. This comes amid a broader recovery in domestic consumption and easing inflation, which together provide a more favourable operating environment for lenders.
Point of View
But the more telling number is the gap between private and PSU bank earnings forecasts — 21% versus 8% CAGR. That divergence reflects structural differences in underwriting quality and capital efficiency that have widened since the post-pandemic credit cycle began. The Nifty Private Bank Index's flat 12-month run, despite solid fundamentals, suggests the market has been pricing in macro and FII-flow risk rather than earnings. If those headwinds ease, the re-rating could be swift. The NBFC segment's reliance on GST-cut-driven disbursements, however, is a variable worth watching — policy-driven tailwinds can reverse, and unsecured lending stress has not fully played out across the sector.
NationPress
7 Aug 2026
Frequently Asked Questions
Why are BFSI stocks expected to outperform in the near term?
BFSI stocks are expected to outperform due to robust banking credit growth of 17.6%, an improving macroeconomic environment, and a recovery in sector earnings, according to a Motilal Oswal Financial Services report. Improving management commentary and steady credit demand are seen as additional catalysts.
What is the credit growth forecast for Indian banks over FY26–28?
Motilal Oswal projects banking system credit to grow at a CAGR of 14 per cent over FY26–28, building on the current 17.6 per cent growth rate driven by corporate, retail, and MSME lending.
How do private bank earnings compare with PSU banks?
Private banks are projected to deliver an earnings CAGR of approximately 21 per cent over FY26–28, significantly ahead of the roughly 8 per cent CAGR forecast for PSU banks. Motilal Oswal prefers large private banks for their valuations and balance sheet strength.
How did NBFCs perform in Q4FY26?
NBFCs delivered a healthy performance in Q4FY26, supported by strong disbursement momentum in vehicle finance, gold loans, and unsecured lending, partly aided by GST rate cuts. Housing finance companies, however, saw modest growth due to competitive pressure from banks.
Why has the Nifty Private Bank Index been flat despite strong credit growth?
The Nifty Private Bank Index was broadly flat over the past 12 months as large-cap private banks faced uncertain macro conditions, margin pressure, and persistent FII selling. Mid-sized private banks outperformed during the same period, according to the report.
