The banking sector is experiencing clear short-term headwinds with recent market pressure led by banking stocks. According to The Economic Times, FPIs have been selling what they own the most - banking and financial services stocks after a gap of two months. This selling pressure comes as banking stocks have come under pressure in the last two days, creating challenges for the sector's near-term performance. However, analysts maintain that the question investors should ask is: Are these headwinds likely to hit the core business of banks and create issues that may take a long time to settle?
Nifty Bank lost nearly 1,800 points to briefly fall below 54,000 on Tuesday, marking the first time since early June as investors brace for imminent interest rate hikes from the RBI. The Reserve Bank of India is set to hold its Monetary Policy Committee meeting from October 5 to October 7, with markets pricing in steep rate hikes of 125 basis points by RBI in the next one year. However, Nomura suggests this cycle is fundamentally different and expects policy fine-tuning instead, with a higher chance of a cumulative 50 bps rate hike. As per Systematix Group, repo rate hikes lead to an initial increase in NIMs due to the lead-lag effect in repricing of advances versus deposits, though net interest margins may stay range-bound over Q2 FY27.
BofA Securities maintains 'Buy' ratings on all four major banks - State Bank of India (SBI), ICICI Bank, HDFC Bank, and Kotak Mahindra Bank - with price targets implying significant upside potential. According to BofA's latest research, India's large banks are entering a stronger credit cycle, with the brokerage expecting the recovery to play out differently across each institution. The firm's analysis points to bank credit growth reaching around 20% year-on-year by August-end, with improving liquidity environment supporting loan demand across the sector.
BofA's assessment of SBI centers on the bank's superior funding franchise and balance-sheet position as credit demand improves. The brokerage expects SBI to deliver robust loan growth and healthy RoA, citing the bank's superior funding franchise, lower domestic LDR and healthy demand in corporate/SME segments. BofA also sees SBI as relatively well placed for the transition to expected credit loss-based provisioning, citing its provision buffers and low slippage levels. The brokerage retained its 'Buy' rating with a price objective of ₹1,250, implying 26% upside from current levels.
BofA expects ICICI Bank to sustainably outgrow the industry by around 2-3%, supported by its business banking and retail franchises. After a temporary slowdown in loan growth in early FY26, ICICI Bank has re-emerged as one of the fastest-growing large private banks. The brokerage expects the bank to maintain broadly stable NIMs and sees scope for further support from a possible rate hike and recovery in unsecured lending. BofA raised its price objective to ₹1,650 from ₹1,600, implying 23% upside from current levels, citing the bank's execution across growth, profitability and asset quality supporting a valuation premium to peers.
Recent market performance shows significant divergence across major banking stocks, with HDFC Bank being the worst performer with -27.24% returns in 2026, while ICICI Bank has been among the strongest performers with only -2.05% returns. According to Motilal Oswal Financial Services, all four major banking stocks have declined since the beginning of 2026, with the recent underperformance attributed to rising borrowing costs, flattening yield curves and broader macroeconomic uncertainties. Axis Bank emerges as the most attractively valued on an earnings basis, trading at 11.3 times one-year forward earnings - a 69% discount to its 10-year average P/E multiple. Meanwhile, HDFC Bank stands out on a price-to-book basis, trading at 1.7 times one-year forward book value - a 43% discount to its 10-year average P/B multiple.
Recent analysis by Value Research reveals that 10 of 23 stocks clearing their growth-and-value screen turned out to be PSU banks, highlighting a pattern in the banking sector. According to Value Research, the profit growth came from falling provisions rather than faster business growth, with a combined loss of ₹87,357 crore in FY18 becoming a combined profit of ₹1.98 lakh crore in FY26. The analysis shows that about 0.7% of these banks' loans turned bad during FY26, significantly lower than previous years. However, Value Research warns that this kind of growth runs out, as provision bills can only shrink until they reach normal levels, after which profit growth will depend solely on business expansion. From April 2027, new RBI rules require banks to provide for expected losses before loans turn bad, and several state-run banks expect a one-time hit of 3-9% of net worth.
The banking sector's struggles are evident in the Bank Nifty's muted performance across various timeframes. As reported by ET Now, the index has delivered -1.38% returns over one week, -3.36% in one month, -4.46% over three months, and -6.92% year-to-date. However, the sector shows longer-term resilience with +3.49% returns over six months, +1.10% over one year, +24.16% over three years, and +46.92% over five years. The sector's weakness highlights the challenges facing banks and the lack of sustained investor interest compared to other market segments. Advances growth remains strong, driven by a pick-up in demand from large industries and steady growth in MSMEs, while liquidity should remain healthy going forward.
