New Delhi

The Indian banking and financial services (BFSI) sector is poised for a gradual recovery after a challenging FY26, with improving earnings visibility and structural tailwinds expected to drive medium-term performance, according to a recent report by Motilal Oswal Financial Services (MOSL).

The report characterizes FY26 as a "challenging year for investing," noting that macro volatility, margin pressures and weak loan growth weighed on sectoral performance."

However, it also highlights and stated that 21 stocks within their BFSI coverage universe delivered more than 25% returns, underscoring the importance of stock selection and the breadth of opportunities within the sector.

Despite near-term headwinds, the sector continues to expand structurally. MOSL notes that "BFSI market cap has expanded to INR108t in 2026 from INR91t in 2025, reflecting a growth of ~18% in a year," driven by outperformance in PSU banks, NBFCs and fintechs, alongside ongoing technological shift and innovation. Digitalisation and retail credit penetration remain key long-term drivers, broadening the investment universe beyond traditional banking.

On the earnings front, the report flags that estimates have seen downgrades due to margin pressure, weak loan growth, and high credit costs, although it adds that the pace of earnings revisions...has moderated significantly in recent months. Importantly, early signs of stabilisation are emerging, particularly with improving collection efficiencies and asset quality trends in unsecured segments.

MOSL expects FY26 to mark the trough in the earnings cycle, with sector growth bottoming out at 5% YoY in FY26E. Thereafter, a recovery is anticipated, supported by easing credit costs, stabilising margins and a pickup in loan growth.

The outlook for the next two years remains constructive. The report estimates that "earnings growth will rebound to 16-17% in FY27-28," with private banks expected to deliver even stronger momentum at around 20% growth over the same period. This recovery is expected to be aided by macro levers such as GST-led formalisation, direct tax cuts and lower borrowing costs.

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Crucially, MOSL underscores that "this recovery in earnings momentum, along with improved loan growth...should help to drive better sector performance over the medium term."

In summary, while near-term pressures persist, the BFSI sector appears to be transitioning into a recovery phase, with structural growth drivers intact and earnings momentum set to improve meaningfully from FY27 onwards.