Banking stocks have witnessed a sharp decline, in line with the broader Indian stock market, since the onset of the US-Iran war in the Middle East. The Bank Nifty index has fallen 10% over the past month and is down more than 12% on a year-to-date (YTD) basis. In comparison, the benchmark has declined over 8% in the last month and nearly 11% YTD.
Within the banking space, PSU banks have underperformed their private sector peers, consistent with trends observed during previous market corrections. The index has dropped 16%, while the Nifty Private Bank index has declined 14.5% over the past month.
After this correction, analysts believe the banking sector valuations have turned more reasonable. The sector outlook remains constructive, supported by margin stabilisation, improving asset quality, and expectations of an earnings recovery beginning Q4FY26.
“We maintain a constructive outlook on the banking sector with valuations turning attractive post the sharp correction for most , especially the larger names. Asset quality remains a position of strength, with credit costs trend remaining benign and near-term impact of the conflict on asset quality being largely insignificant,” said Axis Securities.
It remains watchful of retail-led granular deposit mobilisation ability of banks at competitive rates to support the strong credit growth and their resultant impact on net interest margins (NIMs). The brokerage firm favours banks with superior liability franchises and healthy CASA ratios and deposit granularity.
Axis Securities adopts a nuanced stance on the sector, and takes a selective preference towards financiers with attractive valuations, adequate capitalisation and healthy growth visibility.
However, for both banks and NBFCs, it remains vigilant regarding the pressures posed by the geopolitical headwinds in West Asia, which could disrupt growth momentum, impact NIMs and weigh on the asset quality of lenders.
Impact on US-Iran war on banking sector
A prolonged US-Iran war could pose significant challenges for banks and NBFCs by keeping crude oil prices elevated, thereby impacting economic growth through demand-side pressures. Corporate capital expenditure, particularly in oil-sensitive sectors, may be deferred, while MSMEs could face margin pressures due to rising input costs and supply chain disruptions. The commercial vehicle demand cycle may also weaken amid potential domestic disruptions.
According to Axis Securities, sustained inflation could limit the (RBI) room for repo rate cuts. Additionally, heightened competition for deposits to sustain credit growth may push up the cost of funds, weighing on lenders’ margins. Rising could also exert near-term pressure on treasury income, particularly for PSU banks.
Banking Stocks To Buy
Axis Securities’ preferred picks in the banking sector include , Kotak Mahindra Bank, (SBI), , AU Small Finance Bank, and Ujjivan Small Finance Bank.
Among NBFCs, the brokerage firm prefers , Bajaj Finance, and Can Fin Homes.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.