After a prolonged phase where public sector banks dominated market returns, analysts are increasingly shifting back toward private lenders, betting on stronger operating stability and better earnings visibility. According to reports from NDTV Profit, Aditya Shah, founder of Hercules Advisors, expressed preference for private banks like HDFC Bank, which is trading at about five to 10-year low valuations. He noted that heavy FII ownership had weighed on private bank stock performance over the last two to three years, with only ICICI Bank delivering returns among other private banks. Market expert Digant Haria from GreenEdge Wealth reinforces this trend, noting that private banks offer significant value in names like ICICI, Kotak, and Axis, with the sector delivering strong results across the board.
A comprehensive report by Antique Stock Broking reveals that private sector banks are positioned for significantly stronger earnings performance over the next two years. The brokerage expects private banks to deliver around 17% earnings growth during FY26-28, compared to nearly 6% growth for PSU banks during the same period. While loan growth for both private and PSU banks is expected to converge at around 14% year-on-year during FY26-28, private banks are likely to maintain FY27 Net Interest Margins (NIMs) broadly in line with or higher than FY26 exit levels due to favourable asset mix changes. This margin stability advantage is expected to drive the earnings outperformance despite similar loan growth trends. As per GreenEdge Wealth, the genesis of strong Q4 earnings was the RBI rate cuts and easing cycle that began in February 2025, with strength typically building up over 11-12 months.
Private lenders continue to trade at premium valuations compared to PSU peers, with ICICI Bank trading at around 2.18x one-year forward price-to-book value and HDFC Bank at 1.87x. According to NDTV Profit, consensus estimates imply around 33% upside for HDFC Bank and nearly 30% for ICICI Bank. In comparison, most PSU lenders have relatively lower implied upside despite cheaper valuations, with State Bank of India offering around 23% upside and Bank of Baroda and Punjab National Bank in the low-to-mid teens range. The report notes that valuations of larger private banks are currently at decadal lows and may see an upward re-rating if expectations of earnings upgrades increase in the event of interest rate hikes. However, GreenEdge Wealth cautions that meaningful upside may remain capped in the near term due to macro headwinds including inflation, currency depreciation, and geopolitical tensions.
PSU banks are expected to face significant challenges that could limit their earnings growth potential. As reported by Antique Stock Broking, PSU banks are likely to face pressure on profitability from multiple factors, including weaker other income, wage revision provisions and expected credit loss provisioning. The report highlighted that PSU banks may witness weaker treasury and other income in FY27 because of rising bond yields, which have already increased during the first quarter. Additionally, PSU banks could face additional pressure from wage revision provisions in FY28 along with front-loaded Expected Credit Loss (ECL) provisioning in FY27. These factors are expected to keep PSU banks' earnings growth significantly lower than their private sector counterparts despite similar loan growth trends. However, GreenEdge Wealth rejects concerns about structural stress, attributing recent volatility to macro shocks and overheating in the previous rally, with bond yield movements impacting treasury portfolios but representing short-term technical corrections.
Despite strong fundamentals, market experts caution that external pressures could delay further upside in the banking sector. As noted by GreenEdge Wealth, meaningful rally may remain capped until the Iran war ends, oil prices stabilize around $90, or the currency stabilizes. The expert emphasizes that long-term investors should consider accumulation, though short-term returns may remain muted over the next 3-6 months. On the positive side, the microfinance sector appears to be entering a recovery phase after 25 months of challenging conditions, with companies reporting strong March quarter results. Gold loans also show promise with fantastic growth and strong outlook. For non-banking financial companies, the microfinance and gold loan segments are standout performers, while mining names like NMDC or MOIL are preferred plays for long-term investors.
