Indian banks set for core earnings rebound of 17% annually through FY29

Indian banks are poised for a significant turnaround in core earnings, with growth projected to accelerate to roughly 17 per cent year-on-year between FY26 and FY29, according to a Goldman Sachs analysis. This marks a sharp departure from the subdued profit growth seen in recent years.

The investment bank's outlook is built on expectations of steady loan expansion of around 14 per cent, a recovery in net interest margins from a projected trough in FY27, and stable asset quality. These factors are seen as outweighing near-term macroeconomic and geopolitical headwinds.

Goldman Sachs notes that its proprietary leading indicator for the Indian banking sector points to a gradual improvement, supported by healthy GDP growth, improved liquidity following recent Reserve Bank of India measures, and easier funding conditions.

The report argues that structural challenges—such as intense deposit competition, slowing growth in low-cost deposits, and compressing risk spreads—are already reflected in current market valuations. Private bank stocks have fallen to near 15-year lows, dipping below levels seen during the COVID-19 pandemic, and are now considered attractive relative to regional Asian peers.

This projected upturn follows a three-year period of consistent downgrades. Between FY24 and FY26, core pre-provision operating profit grew at a compound annual rate of just 9 per cent for private banks and 5 per cent for state-owned banks. The downgrades were driven by a challenging macro environment, asset-quality pressures in unsecured lending for private banks, and falling interest rates that weighed on margins.

Goldman Sachs also flagged potential risks to its projections. These include higher-than-expected competitive intensity, a slower recovery in retail credit demand, deteriorating asset quality in the MSME segment, and sustained margin pressure if loan spreads do not improve with the interest rate cycle.