Q2 FY27 Bank Earnings Preview: PSU vs Private Banks Performance Outlook

The Q2 FY27 corporate earnings season has commenced, drawing significant attention to the banking sector as analysts anticipate robust financial results. The outlook is shaped by factors such as increased foreign currency non-resident (bank) deposits, known as FCNR (B) inflows, improved net interest margins (NIMs), and potential gains from stake sales.

Public Sector Banks (PSBs) are expected to demonstrate stronger profit growth compared to their private counterparts, although private banks may post higher increases in net interest income (NII). Motilal Oswal Financial Services highlights ICICI Bank, State Bank of India (SBI), Kotak Mahindra Bank, and AU Small Finance Bank as key selections within the sector for investors.

Among private lenders, HDFC Bank is predicted to maintain solid deposit growth, largely supported by FCNR (B) deposits. Meanwhile, Punjab National Bank (PNB) is set to report a slight improvement in net interest margins. Union Bank of India may experience a modest rise in credit costs but could see some asset quality enhancement. Axis Bank is likely to benefit from reduced technical slippages, resulting in a marginal drop in credit costs.

When comparing profitability, private banks are projected to achieve a 24% year-on-year increase in profit after tax (PAT) for the quarter. In contrast, PSU banks might surpass this with a 27% annual PAT growth. On a quarter-on-quarter basis, PSU banks could see a more pronounced PAT rise of 19%, compared to 1.7% for private banks.

The Motilal Oswal report attributes this solid performance of PSU banks to steady business expansion and expected gains from stake sales involving SBI Mutual Fund and NSE holdings, as well as similar transactions at Bank of Baroda (BoB) and Indian Bank (INBK). BoB’s profit normalization also contributes to this positive projection.

However, net interest income trends provide a contrasting perspective. Private sector banks are estimated to grow their NII by approximately 13% annually, outpacing PSU banks, which are forecast to record around 10.8% growth in this area.

Breaking down private banks’ NII, HDFC Bank is expected to post an 8.9% year-on-year increase, with a 2.5% rise quarter-on-quarter. ICICI Bank’s NII could advance 16.8% annually and 3.1% sequentially, while Axis Bank may see 8.5% yearly growth and a 1.9% quarterly uptick. Kotak Mahindra Bank is forecast to achieve 14% growth year-on-year and 5.1% quarter-on-quarter.

AU Small Finance Bank stands out with an anticipated profit surge of nearly 53.6% on an annual basis and a sequential expansion of net interest margins by 4 basis points.

This period's banking sector performance is a reflection of broader market dynamics. The infusion of FCNR (B) deposits is significant as it provides banks with low-cost funding, enabling margin improvements in a competitive lending environment. Additionally, stake sales by PSU banks contribute to one-time gains, influencing overall profit figures.

Motilal Oswal’s focus on ICICI Bank, SBI, Kotak Mahindra Bank, and AU Small Finance Bank underscores these entities’ strong fundamentals and strategic positioning within the industry amid evolving macroeconomic factors. The report assigns buy ratings with target prices of Rs 1,750 for ICICI Bank, Rs 1,300 for SBI, Rs 470 for Kotak Mahindra Bank, and Rs 1,275 for AU Bank.

Investors and market watchers will be closely monitoring the Q2 FY27 results for deeper insights into credit growth trends, asset quality developments, and margin trajectories across both public and private sector banks. This earnings season is expected to offer a clearer picture of how Indian banks are navigating the challenges and opportunities presented by current economic conditions.