Foreign brokerage houses, such as Goldman Sachs and Bernstein, have become more selectively optimistic about the banking sector. According to recent industry reports, Indian banks could demonstrate broad profit growth over the next few years. This growth will be supported by healthy increases in lending, improved funding conditions, stable or growing Net Interest Margins (NIMs), favorable asset quality, and consistent cost discipline.
Bernstein forecasts that lending growth in the sector will remain steady at around 13–15 percent in the 2026–2027 fiscal year (FY27). This is driven by rising inflation and subsequent improvement in nominal lending growth. Favorable liquidity conditions, it is noted, will continue to support credit expansion, although any tightening of policy in response to rising inflation may slow down growth rates in the second half of the year.
The brokerage firm expects Net Interest Margins (NIMs) to remain generally stable, as most deposit rate revisions have already been completed by banks. However, any interest rate hike could provide a short-term boost to margins. Asset quality is also expected to remain favorable, with no signs of significant deterioration in systemic stress indicators. This was stated by Pranav Gundlapalle, Ishan Mittal, and Anirudh Gupta from Bernstein in a recent report.
Earnings Recovery
Goldman Sachs analysts are also positively assessing the banking sector, asserting that the macroeconomic environment is approaching an inflection point. The GS Macro leading indicators suggest a favorable environment for banks, provided that current geopolitical conditions do not deteriorate significantly.
The brokerage firm anticipates that Profit Before Tax and Provisions (PPoP) growth will accelerate to high double digits during FY27–FY29, which they believe could lead to significant stock appreciation. Their confidence in earnings recovery is based on several factors, including strengthening lending growth driven by retail credit recovery, sustained momentum in the Micro, Small, and Medium Enterprises (MSME) segment, and improved deposit growth prospects.
Goldman Sachs believes that deposit growth will benefit from the active attraction of FCNR (B) deposits in Indian banks. Furthermore, they see potential for NIM improvement, driven by a more favorable funding environment, a shift towards higher-margin loans, and the possibility of interest rate hikes in 2028. Continuing trends of favorable asset quality should also support profits. The brokerage firm expects further improvement in non-performing loan metrics, while consistent cost savings in Indian banks are likely to aid profitability over the next two years, with revenue growth outpacing operating expenses.
Preferred Picks
Among large private banks, Goldman Sachs sees the strongest growth potential in ICICI Bank and Kotak Mahindra Bank, supported by expected PPoP growth of 17 percent and 15 percent, respectively, during FY26–FY29. The company has initiated coverage on HDFC Bank and Axis Bank with a 'Buy' rating, despite expectations of further consensus profit downgrades, citing attractive valuations.
Meanwhile, Bernstein assigns 'Outperform' ratings to ICICI Bank, Axis Bank, HDFC Bank, and IndusInd Bank, while Kotak Mahindra Bank and State Bank of India (SBI) receive a 'Market-Perform' rating. The brokerage firm also updated its models for Axis Bank, Kotak Mahindra Bank, and SBI following their latest quarterly results, making minor adjustments to its assumptions regarding growth and margin.
Regarding mid-sized banks, Goldman Sachs believes that a further rating upgrade requires sustained Return on Equity (RoE) above the cost of capital, which they consider a challenging task for several lenders. The company assigned 'Neutral' ratings to IDFC First Bank, Bandhan Bank, and IndusInd Bank, while Yes Bank and RBL Bank received a 'Sell' rating. AU Small Finance Bank and Federal Bank were initiated with a 'Buy' rating. Federal Bank is viewed as a turnaround story as it continues its restructuring.
Goldman Sachs is more cautious regarding public sector banks. They anticipate a gradual normalization of credit costs and structurally lower PPoP margin profiles, which will put pressure on asset returns. The company assigned 'Sell' ratings to Bank of Baroda and Punjab National Bank. SBI received a 'Neutral' rating, supported by its stronger financing franchise and improving fee income profile.