MOFSL in a fresh note said private banks are likely to outperform PSU banks, driven by anticipated annual earnings growth of 21 per cent compared with 8 per cent for PSU banks. Its top picks include ICICI Bank Ltd, HDFC Bank Ltd, State Bank of India Ltd and AU Small Finance Bank Ltd.

MOFSL said public sector banks (PSBs) have been gaining incremental market share in credit and together account for 53 per cent of the loan mix as of March 2026. It said FY26 turned out to be the second consecutive year in which PSBs gained market share over private banks. However, going forward, it estimated private banks' growth to recover, and the segment will likely outpace PSBs. 

This, it said, will be led by higher participation of private banks in corporate credit, business banking, and MSME lending and recovery in unsecured credit as well.

"We have modeled a growth of 14.8 per cent YoY for private banks and 12.8 per cent YoY for PSBs in our coverage universe for FY27. The C/D ratio for private banks is likely to remain flat at 90 per cent for FY27/FY28, while for PSBs, the C/D is expected to go up to 82.5 per cent in FY28 from 79.8 per cent in FY26," MOFSL said.

The brokerage has a target of Rs 1,750 on ICICI Bank, Rs 1,100 on HDFC Bank, Rs 1,300 on SBI and Rs 1,275 on AU SFB, hinting at 24-38 per cent potential upsides. 

MOFSL said macroeconomic conditions are becoming more favorable for large banks, supported by improved liquidity, a near-term appreciation of the dollar-rupee exchange rate, potential repo rate hikes by the end of FY27, declining bond yields, increased anticipated participation in mobilizing FCNR(B) deposits, and overseas borrowings at lower funding costs.

Following a largely muted 2025, bank credit experienced a surge in 2026, backed by GST rationalization and the impact of an overall 125 basis points (bps) rate cut by the RBI. This led to healthy credit momentum sustaining at mid-teen levels in the early parts of 2026, MOFSL said.

As per the latest fortnightly print as of May 31, the credit growth has surged further to 17.7 per cent YoY, nearing decadal high levels. The credit growth has sustained these levels despite the uncertainty in the current macro environment and rising inflationary pressures, MOFSL said.

It said credit growth is likely to be further supported by improved deposit mobilisation and enhanced systemic liquidity, resulting from recent RBI relief measures aimed at attracting higher FCNR(B) deposits and overseas borrowings, as well as the resolution of the West Asia crisis.

"Overall, we expect growth to surge further by the end of 1QFY27, gradually moderating to mid-teens as we approach 2HFY27. We have currently penciled in a growth of 13.6 per cent for FY27 for our banking universe, and we do envisage an upside risk to our current estimates if the current growth momentum continues while macroeconomic conditions turn favorable," MOFSL said.