Most private banking stocks have seen healthy buying interest recently amid strong Q1FY27 earnings, even though some major players have reported higher funding costs and margin pressure.
Stocks such as Karnataka Bank have jumped over 15% so far in August. Shares of DCB Bank, AU Small Finance Bank, City Union Bank, Kotak Mahindra Bank, IDFC First Bank, and Axis Bank have gained between 1-9% this month so far.
However, two major private banking stocks- ICICI Bank and HDFC Bank– are down 1% and 3%, respectively, this month due to profit booking.
What is driving private banking stocks?
A confluence of factors is supporting healthy buying interest in private banking stocks. The Q1 numbers of several private lenders, such as ICICI Bank, Axis Bank, and IDFC First Bank, were better than expected. Their asset quality improved, with several of them reporting NPAs at multi-year lows.
The return of foreign investors and the RBI’s status quo on interest rates are also key positives for lenders.
“India’s credit growth is running at 12-14% a year, and the RBI’s policy stance remains supportive of growth. Private banks are best placed to benefit from this because of their strong lending practices, better technology, and a more retail-focused loan book compared to public sector banks,” said Vinit Bolinjkar, the head of research at Ventura.
Besides, experts point out that FCNR (B) mobilisation has been strong, which could help sustain healthy credit growth.
Brokerage firm ICICI Securities believes FCNR (B) is NII- and EPS-accretive, and arguably more important than NIM, especially at the current juncture, when asset quality and liquidity are benign.
Harshal Dasani, Business Head at INVAsset PMS, highlighted that the private bank index is breaking out of a cup-and-handle formation, a pattern that reflects sustained institutional accumulation rather than a trading bounce.
The road ahead
Experts appear largely positive about the private bank sector. However, some appear a little cautious about margins.
“The positives are structural: double-digit credit growth, generational bests on asset quality, Axis Bank calling its 3.46% NIM the cycle bottom, and treasury gains from softer yields cushioning earnings. The caveat is margins, which remain the live pressure point as loan-book repricing outpaces deposit repricing, meaning NIM compression can persist another quarter or two before the trough is confirmed,” said Dasani.
“If Axis Bank is right about the bottom, this rally has a long runway. If margins compress further, the sector consolidates rather than corrects, because asset quality provides a real floor beneath the price,” Dasani said.
What should investors do?
Experts recommend selectively betting on private lenders, as they believe the sector is among the most attractive risk-reward propositions in Indian equities today.
“Banks are the cleanest proxy on India’s structural growth, without the AI-disruption question hurting IT or the demand fatigue hurting consumption. Valuations sit well below the peak multiples of the last cycle. And FPI re-entry cycles historically favour financials first and hold them longest,” said Dasani.
“The framework is to prioritise print quality over headline growth: ICICI Bank for consistency, Axis Bank for margin-recovery leverage if you underwrite the bottom call, HDFC Bank for patient capital awaiting post-merger acceleration, and Kotak Mahindra Bank with caution since its beat was provisions-led rather than core,” said Dasani.
Dasani recommends accumulating the stocks on consolidation rather than chasing the breakout, and treating any macro-driven dip as the deployment window.
Ravi Singh, Chief Research Officer at Master Capital Services, said for portfolio and long-term investors, HDFC Bank, ICICI Bank and Axis Bank remain preferred picks, with selective accumulation on declines.
However, Singh emphasised that a sharp sector-wide rally may take some time.
“The market is likely to closely track Q2 earnings, particularly deposit growth, credit growth and margins. Private banks could therefore remain rangebound over the next quarter, but the underlying setup remains constructive, with stronger momentum likely once earnings visibility improves,” said Singh.
Bolinjkar pointed out that many private bank stocks have underperformed the broader market for some time. This has made valuations more reasonable rather than expensive. That’s usually a good time to buy, not sell.
“Some short-term traders may worry about near-term margin pressure or further rate cuts squeezing bank earnings. That’s a fair short-term concern. But for investors looking 2-3 years ahead, this looks more like a good buying opportunity than a reason to exit,” said Bolinjkar.
Bolinjkar is bullish on HDFC Bank, as the stock trades well below its 52-week high, making it one of the more attractively priced large-bank stocks today.
Bolinjkar said while HDFC Bank’s margins have been under some pressure since its 2023 merger with HDFC, the core business remains very strong.
“HDFC Bank has one of the lowest bad loan ratios in the industry, it has a large, low-cost deposit base, it has a huge branch and ATM network across the country, and it has continued strong institutional investor holding, even through the merger integration phase – a sign that big investors still trust the long-term story,” said Bolinjkar.
“Private bank stocks, and HDFC Bank in particular, look better placed for accumulation than profit-booking at current levels, backed by strong credit growth, healthy asset quality, and reasonable valuations after a long phase of underperformance,” Bolinjkar said.
ICICI Securities finds current valuations for large private banks, such as Kotak Mahindra Bank, Axis Bank, and HDFC Bank, compelling, and believes clarity on MD and CEO re-appointments or succession at HDFC Bank and Kotak Mahindra Bank, along with rising NII growth, could act as a re-rating catalyst for the entire sector.
ICICI Securities has buy recommendations on HDFC Bank, Axis Bank, Kotak Mahindra Bank, RBL, DCB Bank, Karur Vysya, and IDFC First Bank from the private banking space.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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