Banking stocks have seen significant selling pressure this year so far amid mixed earnings and weak market sentiment due to geopolitical factors. Recently, they experienced additional headwinds as fresh regulatory changes around how banks need to provision for loans spooked investors.
The Reserve Bank of India (RBI) has issued the “expected credit loss (ECL)” framework mandate, with 1 April 2027 as the deadline. Under the new guidelines, financial assets will be classified in three stages, depending on whether there has been a significant rise in credit risk since initial recognition.
The Bank Nifty is down 8% this year so far, mirroring the trend in the benchmark Nifty 50, which has also lost 8% this year so far. Stocks like HDFC Bank, IDFC First Bank, and Kotak Mahindra Bank have lost over 10% this year so far.
Is the correction in banking stocks an opportunity to buy?
The banking sector is considered a proxy for the country’s economic growth. Amid persisting uncertainty around the US-Iran conflict and rising concerns that the full impact of the elevated crude oil prices on the growth-inflation dynamics of the country could be significantly negative, the outlook for the sector has turned hazy.
Experts believe the macro headwinds and global uncertainty may keep the sector range-bound for a few more weeks. So, the strategy should be to accumulate quality banking names in a staggered manner rather than going all-in at once.
“Avoiding banking stocks entirely right now would mean missing out on one of the better entry points this sector has offered in recent times. Panic selling at this point would be a mistake. Accumulate quality banking names in a staggered manner,” said Ravi Singh, Chief Research Officer (Research) at Master Capital Services.
“Looking at the bigger picture, this correction feels more like a buying opportunity than a reason to run for the exits. Public sector banks need to be approached with more care here, as the regulatory transition will hit them harder and their near-term earnings could remain under pressure. But the stronger private sector banks are available at much better prices than they were a few months ago, and that is an opportunity worth paying attention to,” Singh noted.
However, experts emphasise that investors must be selective when picking stocks in the sector.
Paresh Bhagat, Chief Investment Officer (CIO) – Veer Growth Fund (AIF), and Chairman at Mangal Keshav Financial Services is cautious about banking stocks for the near term as they remain a large part of FII ownership in India, and if foreign investors continue to reduce exposure due to currency pressure, higher US yields or global risk-off sentiment, banking stocks can remain under pressure despite decent fundamentals.
“The sector is structurally important, and many banks are still well-capitalised and have stable asset quality. Still, near-term returns may be driven more by FII flows than by fundamentals alone. Investors should therefore avoid aggressive buying for now and wait for better stability in flows, currency and valuations. Selective accumulation can be considered later in stronger banks with good deposit franchises, but tactically, caution is warranted,” said Bhagat.
Sonam Srivastava, the founder and fund manager at Wright Research, pointed out that the selling in the banking sector has created a more attractive entry point from a valuation perspective.
Srivastava underscored that large private sector banks and select PSU banks now trade at levels that price in near-term headwinds, making the risk-reward more favourable for patient investors. That said, the timing of any recovery will depend on a few key variables.
“The trajectory of the RBI’s rate cycle matters significantly. As rates ease, net interest margins will face some short-term compression, but this is usually offset over the medium term by higher credit demand and improved asset quality as borrowing costs fall for corporates and retail consumers. The current cycle of rate cuts, if it continues as expected, could boost banking sector earnings over the next 4 to 6 quarters,” said Srivastava.
From a portfolio standpoint, Srivastava does not believe it is a moment to avoid banking stocks categorically. Rather, it calls for selectivity.
“Banks with strong liability franchises, well-managed credit books, and healthy capital adequacy ratios are positioned to navigate the current environment and emerge stronger as the cycle turns. Investors with a 12 to 18-month horizon can consider staggered accumulation in quality names rather than waiting for the perfect entry point, which rarely appears. Chasing absolute bottoms in a cyclical sector like banking is often counterproductive,” said Srivastava.
Shashank Udupa, a SEBI-registered research analyst and fund manager at Smallcase, highlighted that today Indian banks, mainly PSU and NBFCs, are very clean and have a strong scope to grow in the next five years.
Most of the Public sector mega banks are coming out with good results. Many of them even traded at very low price-to-book ratios, some even less than 1 price-to-book.
“We are witnessing a small profit booking, but for someone who has a long-term horizon, we are still bullish on the banking sector. This conviction is backed by a strong balance sheet and credit growth pick up taking place in smaller rural pockets,” said Udupa.
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Disclaimer: This story is for educational purposes only. 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.
