Indian banks are heading into what JPMorgan calls a “tsunami of profit.” The brokerage, in a recent report, stated that margins had already bottomed in Q2FY26 and earnings will now accelerate far more quickly than they have in recent years.
According to the international brokerage, sector profit will grow at an annual rate of 17% over FY26–FY28, more than double the pace of the 8% annual growth rate that banks delivered in FY24–FY26. The return on assets is also expected to improve by 24 bps over the same period.
#1 Bank margins stabilise, pave way for better returns
The biggest worry fro banks- the Net Interest Margins (NIMs) – had been under pressure for almost two years as deposit costs rose faster than loan yields. That squeeze was visible in every quarterly results through FY24 and FY25. The report said the pressure finally eased in Q2FY26, when margins stopped falling. With that hurdle behind them, banks now have a smoother road to improve returns, since funding costs will no longer erode the benefit of credit growth.
According to JPMorgan, the Return on Asset will see gradual improvement as deposits reprice more slowly and loan growth continues. The firm said this combination will give banks a more dependable earnings base through FY26–FY28, especially for those with stronger liability profiles.
#2 Earnings can help narrow valuation gap with NBFCs
Until now, NBFCs have outperformed banks by a wide margin, the report noted. The NBFC index had beaten banks by around 33% YTD, taking their valuation premium to a three-year high. This was helped by borrowing costs falling more quickly for NBFCs during the rate-cut cycle, while banks struggled with rising deposit costs. JPMorgan said this gap will not hold if bank earnings improve in line with its estimates.
# 3 Mid-tier banks seen as top candidates for stronger returns
JPMorgan said that two mid-tier lenders, AU Small Finance Bank and IDFC First Bank, carry higher earnings sensitivity. When margins improve and credit costs fall, their returns move up more rapidly than larger banks. For investors looking for quicker profit improvement, this category may offer better results.
AU Small Finance Bank is expected to see RoA improve by about 37 bps through FY26–FY28 as asset-quality pressures ease. IDFC First Bank may see RoA rise by around 54 bps, supported by lower credit costs and better scale economics.
#4 Public-sector banks may continue to deliver value
Public-sector lenders remain an important part of the sector’s next phase, not because they will deliver the highest returns, but because their foundations are now stronger than they have been in several years. The report said SBI, Bank of Baroda and PNB will maintain RoAs in the 0.8–1.1% range through FY26–FY28, a level that would once have been difficult when they were still cleaning up legacy stress.
The brokerage added that these lenders now have steadier deposit franchises, which matter more in a period when the industry is coming off a long stretch of deposit repricing. Their funding base has been consistent, and that gives them the ability to grow without taking on expensive liabilities. Credit costs have also stabilised, reflecting the work done over the past few years to improve provisioning and recoveries.
#5 Mortgage market dynamics
A key part of the story is their presence in mortgages. According to the JPMorgan report, Public Sector Banks have gained 13 percentage points of mortgage market share over the last two years, a change that signals stronger competitiveness in a segment long dominated by private banks. Mortgage books tend to bring predictable margins and lower credit volatility, which helps PSBs maintain the RoA range projected for FY26–FY28.
#6 Credit cost factor
The report also pointed to better cost behaviour. After several years of investing in technology and branch upgrades, PSBs are now seeing the benefit of higher productivity without a matching rise in expenses. This combination of steady funding, stable credit costs and a firmer position in mortgages places them in the value part of the sector for the next three years.
#7 Banks – Risks that may influence next phase
The JPMorgan report said the main risks for banks include the possibility of further rate cuts, which would bring fresh pressure on margins. As of mid-November, the market had still priced in another 25 bps cut. If that materialises, spreads may take longer to settle. Another risk lies in the unsecured segment, where any rise in delinquencies will reduce RoA gains. JP Morgan advised investors to watch deposit traction closely because funding will determine how quickly banks can grow their loan books.
Banks – What the next three years may look like
The JPMorgan report placed FY26 as the beginning of a more favourable three-year stretch. Margins have steadied, credit costs remain low and operating gains will show through as branch and technology investments from earlier years start yielding better results. With these elements in place, banks will have a more reliable runway to improve returns.
