Banks Take a Breather with Q4 Earnings Growth, Cyclicals Step Up the Ranks

The banking sector was once the dominant contributor to India Inc.'s overall earnings. But, not anymore. The recent Q4 earnings made it quite clear: the BFSI sector, as a whole, might be losing its dominant edge. The sector's contribution is on a downward trend, with the baton now being passed to cyclicals and a few standout large-caps.

According to Elara Securities, growth in profit after tax (PAT) remained nearly flat at 0.3% in FY25, in-line with what the D-street was expecting. However, the quarter also brought some positive surprises, especially from sectors like metals, energy and industrials, signalling that the economy might be shifting to an investment-driven growth phase in FY26.

"Banks, which led the previous cycle, currently appear to be peaking in incremental contribution. Earnings upgrades are increasingly centred on energy, metals, and industrials, with consumption and rural trends also strengthening," the brokerage firm said in its report.

The banking sector, which had been the main driver of corporate earnings, now seems to be reaching its peak in terms of how much profit it can add to overall earnings growth.

Losing the Dominance

Banks contributed around 37% of Nifty50's incremental earnings between FY20 and FY25, with PAT surging to ₹2.3 trillion. However, estimates indicate that FY26 might play on a completely different tone for banks. The sector's contribution in incremental earnings is expected to drop to 5.8% with PAT growth of less than 1% (year-on-year).

The sector was already witnessing an imbalance between deposit and loan growth a few quarters back. By the time, things took an improving turn, a series of factors further weighed down the overall outlook. From contraction in net interest margins (NIMs) to faltering core profit levels, maintaining steady margins in a rate-cut environment has taken a toll on the overall sectoral earnings.

"For Financial companies under our coverage, net interest income (NII) growth of 6% was marginally lower than our estimates. Pre-provision operating profit (PPOP) stood flat. Bottomline (PAT) de-grew 4% YoY, in-line with estimates but marking the weakest earnings in the 15 quarters, primarily due to IndusInd Bank," analysts at Yes Securities stated.

While aggressive cost-cutting measures might help in maintaining the profitability levels of private lenders, the sector might lose the tag of king-contributor to overall earnings. So far this year, the Nifty Bank index has surged over 9.21%, after experiencing a range-bound momentum during the initial months of the year.

New Growth Drivers at Play

The banking sector might be losing its dominant crown in overall earnings, but PAT levels are still expected to grow modestly to ₹2,343 billion, marking a 2.6% YoY surge, as per Elara Securities. On the overall basis, the market still remains a stock-pickers play, as per analysts.

But, amidst all this, cyclical sectors are emerging as the new driver of India Inc.'s earnings growth. "The earnings baton is passing to other sectors. FY26 projections show diversified, energy, and metals are emerging as dominant contributors together are expected to account for 60% of incremental Nifty50 PAT," analysts at Elara Securities said.

With crude oil prices staying range-bound at lower levels and domestic steel costs holding steady, energy and metal companies might see a strong boost to their bottom lines. On top of this, the overall sector earnings might get an extra lift from safeguard duties, shielding local producers from cheap imports, and from pre-monsoon restocking as buyers build up inventory ahead of seasonal disruptions.

The baton is now, quite evidently shifting. But as the geopolitical outlook continues to paint a blurry picture ahead, the market remains a stock-pickers play.