Motilal Oswal Identifies Top Bank Stocks as Sector Poised for Earnings Rebound
By Sirali Gupta | Mumbai | July 18, 2025, 2:54 PM IST
The Indian banking sector is on the verge of a significant earnings turnaround, with the third quarter of the current financial year (Q3FY26) marking an “inflection point,” according to leading domestic brokerage Motilal Oswal. The firm foresees a meaningful recovery in profitability from this period onward, driven by easing deposit costs, enhanced liquidity, and stabilizing asset quality—all factors that are expected to bolster banks’ net interest margins (NIMs) and overall earnings.
Key Drivers of the Earnings Recovery
Motilal Oswal’s analysis highlights several structural improvements underpinning their positive outlook:
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Deposit Cost Repricing: Banks have been actively recalibrating term deposit (TD) rates and reducing savings deposit rates. This trend is anticipated to ease funding cost pressures, offering relief to NIMs starting Q3FY26. – Cash Reserve Ratio (CRR) Reduction: The Reserve Bank of India (RBI) plans to phase out a 100 basis points (bp) CRR cut beginning September 2025. This move is expected to release durable liquidity estimated at â‚ą2.5 trillion, easing systemic liquidity constraints and further supporting margin stabilization.
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Credit Cost Normalization: Early signs of stabilization in asset quality, especially in unsecured retail loans and microfinance institutions (MFIs), suggest a forthcoming decline in credit costs. This is particularly beneficial for mid-sized banks and lenders with considerable MFI exposure.
Near-Term Margin Pressures Expected to Ease Post Q2
Despite the optimistic medium-term outlook, the brokerage cautions that NIMs will remain under pressure during the first two quarters of FY26. The continued effects of a cumulative 100-bp repo rate cut are expected to suppress lending yields, with their full impact unfolding through Q2 and Q3. Interestingly, while public sector banks (PSBs) have seen a month-on-month (M-o-M) reduction in the weighted average lending rate (WALR) on fresh loans by 8 bps, private banks reported a surprising 7-bp increase in the same metric during May 2025. Consequently, the sectoral fresh rupee loan yield dipped by 6 bps M-o-M, following declines of 5 bps and 9 bps in March and April respectively.
On outstanding loans, WALR experienced a marginal 1-bp decline M-o-M, with private banks witnessing a slight 2-bp increase, in contrast to a 2-bp drop for PSBs.
Deposit Rates Show Signs of Easing
Motilal Oswal also noted that the weighted average term deposit rate (WATDR) marginally decreased by 4 bps M-o-M to 7.07%. From February through May 2025, PSBs saw a 4-bp decline in WATDR, whereas private banks recorded a 4-bp rise. Beyond term deposits, many banks have slashed savings account rates by 20 to 100 bps across various categories. Collectively, these rate adjustments are expected to ease banks’ funding costs starting Q2FY26. ### Brokerage’s Top Bank Picks
Maintaining a constructive stance despite short-term challenges, Motilal Oswal recommends select large-cap banking stocks as attractive investment opportunities. Their top picks include:
- ICICI Bank
- HDFC Bank
- State Bank of India (SBI)
The brokerage emphasizes these banks’ robust balance sheets, strong liability franchises, and healthy provision coverage ratios (PCRs) as key factors that will help them navigate margin pressures and capitalize on the recovering earnings environment anticipated in the latter half of FY26. ### Sector Outlook: Double-Digit Growth Expected in FY27
Motilal Oswal’s forecast positions FY27 as a year of sustained double-digit earnings growth for Indian banks, underpinned by structural improvements in funding costs, liquidity conditions, and credit quality. Investors are encouraged to monitor the evolving margin trends and the broader economic factors driving credit demand and asset quality.
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This article is based on a report by Motilal Oswal shared on July 18, 2025.