Motilal Oswal Raises FY27 Credit Growth Forecast; ICICI Bank, HDFC Bank, SBI, AU SFB and RBL Bank Among Top Picks

Motilal Oswal Financial Services (MOFSL) has now taken a more optimistic view of India's banking sector and has raised its credit growth forecast for the banking coverage universe from 13.6 percent to 14.6 percent in the year-earlier period of FY27. RBI measures, better liquidity conditions, and a strong demand for loans in all sectors will be key to lending growth in the next year, the brokerage believes.

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The revised estimate is higher than the Bloomberg consensus forecast of around 14.2%, while MOFSL also says that there is still potential upside if macroeconomic conditions remain favourable.

Even with a good picture, global risks such as the ongoing tension in West Asia and crude oil prices are still significant risks with their effect on the banking sector.

Private Banks will outperform PSU Banks

According to MOFSL, private sector banks are likely to continue outperforming their public sector counterparts in FY27.

The brokerage expects:

1. Private banks' credit growth: 15.8% year-on-year.
2. Public Sector Banks (PSBs): 13.7% year-on-year

It also estimates that the banking sector's earnings will grow at a compound annual growth rate (CAGR) of nearly 15% between FY26 and FY28, largely on the back of healthy growth in Net Interest Income (NII).

Private banks are projected to deliver an earnings CAGR of near 20% while PSU banks are projected to register around 10% during the same period.

There is strong credit growth across segments

MOFSL noted that business updates for the first quarter of FY27 indicate one of the strongest periods of credit growth in recent years.

Loan demand has been broad-based across multiple segments, such as:

1. Corporate lending
2. MSME financing
3. Services sector
4. Retail loans

Gold loans were still experiencing strong demand in retail, and vehicle loans also grew in demand.

But credit card loan growth was relatively subdued compared to other retail lending categories.

Private Banks Lead

Large private sector banks covered by the brokerage reported 16.2% year-on-year credit growth, more than most of the industry.

Public sector banks under MOFSL's coverage have 15.1% credit growth, and mid-sized banks have about 13.6%.

Several smaller PSU banks and small finance banks also reported healthy growth in loan accounts, which are indicative of general lending strength in the industry.

Deposit growth is still in a state of flux

Although lending has been strong, deposit mobilisation still lags behind credit growth.

MOFSL says slower deposit growth has resulted in higher loan-to-deposit (LDR) ratios, while CASA ratios have decreased at several banks due to funding pressures.

The brokerage believes that the RBI’s recent relaxation of Foreign Currency Non-Resident Bank [FCNR(B)] deposit norms could attract USD 40–50 billion in foreign currency inflows, easing liquidity conditions and supporting deposit growth.

MOFSL is expecting total deposit growth to be around 13.8% during FY27.

Margins may be under pressure in the near-term

While the long-term outlook is still positive, MOFSL expects net interest margins (NIMs) to remain under pressure in the first half of FY27, with the NIMs to be lower than expected in the first half of FY27.

The factors likely to weigh on margins include:

1. Elevated deposit costs
2. Higher proportion of secured loans.
3. Limited pricing power in the lending market

However, the brokerage expects the situation to improve as RBI liquidity measures, low bond yields, and improved macroeconomic fundamentals start to support profitability in the years to come.

Preferred Banking Stocks

Based on its current outlook, Motilal Oswal Financial Services still suggests the following banking stocks as its preferred investment ideas:

1. ICICI Bank
2. HDFC Bank
3. State Bank of India (SBI)
4. AU Small Finance Bank
5. RBL Bank

Based on the brokerage, these banks are well-positioned to benefit from sustained credit demand, improving earnings, healthy balance sheets, and favourable long-term structural trends in India's banking sector.

Note that this is only an investment advice article and is not advice. Investor investment risks in the stock market are high. Investors need to consult a financial advisor before investing in the stock market.