Pranav Gundlapalle, Senior Analyst for India Financials at Bernstein, has shared a positive outlook on the Indian banking sector, stating that the overall industry is in a strong position following the July-September 2025 (Q2FY26) earnings season. He noted that growth is picking up, margins are set to improve, and asset quality does not pose a sector-wide concern.

“Growth did improve on a sequential basis this quarter, and margins are set for an improvement as well,” Gundlapalle said. He added that even if the Reserve Bank of India implements one or two rate cuts, margins should either steadily improve or at least avoid further downside. This top-down view makes the sector attractive for investors.

Private Sector Banks:
Among private lenders, HDFC Bank and Axis Bank stood out. HDFC Bank is expected to see a profitability trajectory slightly above its peers, due to specific idiosyncratic factors, while Axis Bank’s cheap valuation makes it appealing for investors seeking comfort.

Public Sector Banks (PSBs):
Gundlapalle also expressed optimism for public sector banks, noting that they are growing almost on par with, and in some cases faster than, private sector peers while maintaining a return on assets (ROA) of around 1%. He believes this should support steady compounding for large PSBs.

Key Market Drivers:
According to Gundlapalle, growth will be the main trigger for stock prices, not margins, as the market has largely priced in margin improvement starting from Q3 or Q4. He suggested that sector-wide growth of 13-14% would serve as a major catalyst.

Tier 2 Banks:
While the environment is supportive for activity among Tier 2 banks, Gundlapalle noted that most are fairly valued. He added that a significant re-rating would require strategic shifts and the ability to deliver higher ROAs, saying, “Nothing that screams out as a buy for us.”

Credit Growth Outlook:
Looking ahead, Gundlapalle projects industry-wide credit growth of around 13% for FY26, driven by government consumption-boosting measures, a favourable base effect from the latter half of FY25, and regulatory relief, including the reversal of increased risk weights on lending to NBFCs.