Bank stocks in Q2 FY27: Why ICICI, SBI, Kotak and AU Bank are Motilal Oswal's top picks

Motilal Oswal Financial Services' brokerage estimates point to a strong earnings season for Indian banks. Profit after tax (PAT) across the banks under coverage is expected to grow 25.4% year on year and 9.5% over the previous quarter. Looking further out, earnings are expected to compound at about 15% a year over FY26-28, led by private banks at around 20%. The brokerage’s top picks are ICICI Bank, SBI, Kotak Mahindra Bank and AU Small Finance Bank.

Systemic credit growth stood at 18.8% year on year as of 15 September 2026. Three things are driving it: steady retail demand with MSMEs using more of their limits, healthy corporate borrowing as bond yields stay elevated, and heavy FCNR(B) inflows. The estimate for full-year FY27 is lower, at about 15.5%. Leverage offered through overseas and GIFT City branches should also add to loan growth. Individual banks will vary widely, with expected quarterly loan growth ranging from 3.1% to 14%.

Foreign currency deposits of USD 133 billion have changed the funding picture. They make up roughly 4.5% of system deposits and lifted deposit growth from 11-12% to 17% year on year. The credit-deposit ratio has eased from a peak of 83.4% to 80.8%. The catch is that banks still struggle to raise low-cost deposits. Term deposit rates are expected to stay sticky, with an upside bias, as banks compete for funds.

Fast balance sheet growth is expected to squeeze net interest margins (NIMs) at private banks. Large private banks could see a hit of 8-20 basis points, because FCNR(B) money is being raised and lent against quickly. The pressure should ease as banks put the funds to work in lending and retire costlier liabilities. Among mid-sized banks, RBL Bank should see margins expand thanks to the full-quarter effect of the Emirates NBD capital infusion. IDFC First Bank is expected to see a sharper sequential decline.

Private bank PAT is estimated to rise 24.0% year on year and 1.7% quarter on quarter. Pre-provision operating profit should grow 13.7% year on year. Net interest income (NII) growth estimates for the big four are:

Motilal Oswal expects private banks to deliver 20.7% earnings growth in FY27 and a 20% CAGR over FY26-28.

According to Motilal Oswal, PSU bank PAT is estimated to climb 27% year on year and 19% over the previous quarter. Part of the jump comes from stake sale gains: SBI (SBI Mutual Fund and NSE), Bank of Baroda (NSE) and Indian Bank (NSE). A normalization of Bank of Baroda’s profit also helps. NIMs should stay range-bound because PSU banks raised fewer FCNR(B) deposits relative to their size. NII is expected to grow 10.8% year on year. Treasury gains will stay muted with bond yields elevated, and the longer-term earnings CAGR is estimated at 11%.

According to Motilal Oswal estimation, AU Small Finance Bank is expected to post PAT of INR 8.6 billion, up 53.6% year on year, with NIM rising 4 basis points to 5.94%. NII should grow 29.3%. Credit costs are expected at about 0.8-0.9% of assets as slippages improve and microfinance stress eases. Equitas Small Finance Bank is estimated to earn INR 1.91 billion, up 3.8% quarter on quarter, with NIM dipping to 7.11%. Its loan growth is steady at 30% year on year, led by both microfinance and non-microfinance books.

Payments companies are riding strong volume growth.

SBI Card: PAT is estimated to rise 60% year on year to INR 7.1 billion, with modest loan growth and easing credit costs.
Paytm: Revenue is expected to grow 27% to INR 26.3 billion, contribution margin is steady near 55.4%, and GMV is up 32% to INR 7.5 trillion.
Pine Labs: Revenue is expected to grow 22% to INR 7.9 billion, contribution margin should improve to 74%, and GMV is up 13% to INR 4.8 trillion.

The outlook is positive, but not risk-free. Most banks say stress in secured and unsecured loans is under control, so slippages and credit costs should stay steady. Still, the brokerage is watching three things: an uncertain macro environment, a below-normal monsoon, and its possible effect on credit quality and domestic growth. Banks also face the challenge of raising low-cost deposits, and sticky term deposit rates could weigh on funding costs. For PSU banks, recoveries from the written-off pool are declining.

When Q2 FY27 results arrive, four numbers matter most:

Loan growth: Quarterly growth is expected to range from 3.1% to 14%, with ICICI Bank, IDFC First Bank and RBL Bank posting robust sequential growth.
Deposit growth: Expected range is 2.8% to 18.6% quarter on quarter, with RBL Bank the highest.
NIM commentary: Watch for management guidance on when margins recover.
Asset quality: Check slippages and credit costs for any sign of stress.

Motilal Oswal's top picks are ICICI Bank, SBI, Kotak Mahindra Bank and AU Small Finance Bank. These are broker estimates, not guarantees or personal investment advice, so do your own research or consult a registered advisor before investing.