New Delhi, June 17 (IANS) Banking and financial services stocks are expected to see improved performance, supported by healthy credit growth, an improving macro environment and a recovery in earnings, a report said on Wednesday.

The report from Motilal Oswal Financial Services Ltd said banking system credit growth remained robust at 17.6 per cent, driven by broad‑based momentum across corporate, retail and MSME lending.

The brokerage firm estimates banking system credit to grow at a compound annual growth rate of 14 per cent over FY26–28.

Earnings growth across the sector is expected to gain momentum, with private banks projected to deliver an earnings CAGR of around 21 per cent over FY26-28, compared with approximately 8 per cent for PSU banks.

While banking stocks delivered mixed returns over the past 12 months, the report forecasted performance to improve going forward as management commentary turns constructive and credit demand remains healthy.

The firm preferred large private banks due to reasonable valuations, strong balance sheets and better growth prospects.

The report noted that mid-sized private banks outperformed larger peers over the past year.

Large private banks delivered a muted performance dragged down by uncertain macro, margin pressure and persistent FII selling.

Maintaining a balanced yet constructive stance on the sector, the firm said that improving earnings visibility, steady credit expansion and supportive management commentary are expected to remain key drivers of BFSI sector performance over the medium term.

The Nifty Private Bank Index was flat in the past 12 months as many large-cap banks delivered negative returns.

NBFCs delivered a healthy performance in Q4FY26, supported by strong disbursement momentum across vehicle finance, gold loans, and unsecured lending segments following the GST rate cuts. Housing financiers continued to face competitive pressure from banks, resulting in modest growth performance.

—IANS

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