The leading domestic brokerage firm, Motilal Oswal has placed its bets on three big names among key banking sector stocks. These include ICICI Bank, HDFC Bank and State Bank of India.
In its latest report on the banking space, the brokerage highlighted that while near-term earnings are being cushioned by treasury gains, the real recovery story lies ahead. As per the brokerage house report, the earnings cycle, which has been slowing for several years, could see a turnaround starting from the second half of FY26.
Motilal Oswal’s top banking picks: ICICI Bank, HDFC Bank and SBI in focus
According to the brokerage house report, three lenders stand out in the current cycle.
The top ideas include ICICI Bank, HDFC Bank and SBI. The brokerage house noted that the these three banking counters indicate that, “confidence in their earnings strength despite recent pressures on margins and loan growth.”
“The potential recovery in earnings in H2FY26 will mark an end to the multi-year earnings deceleration cycle and help improve sector performance,” added the brokerage house in its report.
Motilal Oswal on banking stocks: Treasury gains cushion the slowdown
One of the biggest themes in the report is the role of treasury gains in protecting profitability at a time when net interest income (NII) growth has been soft.
The brokerage pointed out, “The share of treasury gains in total other income has thus increased to 22-40% for PSBs and 5-30% for private banks, representing 24%/10% of PBT for PSBs/private banks.”
These gains are fuelled by a rally in G-sec bonds after rate cuts and RBI’s liquidity support. This has offered temporary relief.
Motilal on banking stocks: Why earnings could bounce back in H2FY26
According to the brokerage report, the second half of FY26 could mark the end of a multi-year earnings slowdown for most across the list of banking sector stocks. “With gradual deposit repricing, recovery in loan growth, and benefits from CRR cuts, we expect NII growth to improve from H2FY26 onward, driving earnings recovery,” the report said.
In fact, Motilal Oswal estimated that PAT growth will swing back to 9% YoY in H2FY26, compared to a 4% decline in the first half.
Beyond that, the brokerage expects a much stronger phase. “We further estimate earnings to recover to 17% CAGR over FY26-FY28,” it added.
Motilal Oswal on banking stocks: Margin pressures for now, but relief ahead
For now, banks are still grappling with shrinking net interest margins (NIMs) as deposits reprice faster than loans.
“We continue to believe that NIMs will remain under pressure in 1H and maybe in Q3FY26, due to continued loan repricing,” the brokerage cautioned.
However, relief is expected as funding costs ease in the second half. “A gradual reduction in funding costs will enable margin recovery from 2H onward, translating into healthy earnings growth over FY27E,” Motilal Oswal noted.
Motilal Oswal on banking stocks: Consumption, tax cuts and loan growth recovery
Going forward, the report links sector revival to broader economic drivers. “We expect systemic loan growth to remain modest at 11% in FY26E and recover to 12.5% in FY27E,” it said, adding that lower GST and direct tax rates, recovery in consumption and normalisation in unsecured loans will support demand.
