The banking sector remains in focus as the Bank Nifty index hovers around the 55,000 mark, with investors assessing whether banking stocks — particularly PSU lenders — are poised to lead the market rally going forward.
While banking stocks have remained under pressure in recent months, analysts believe the outlook for the sector will largely depend on interest rate trajectory, bond yields, deposit mobilisation, and the evolving geopolitical situation in West Asia.
The Bank Nifty index has underperformed the benchmark Nifty 50 over the past month. The banking index has fallen more than 2% during the period, compared with a 0.54% decline in the Nifty 50.
However, on a year-to-date (YTD) basis, the gap narrows, with Bank Nifty declining 7.6%, marginally outperforming the Nifty 50, which has dropped 8.3%.
Despite the subdued performance, analysts remain cautiously optimistic on banking stocks, citing stable margins, healthy credit growth, and the possibility of improving net interest margins (NIMs) if interest rates move higher.
Banking Sector Q4 Results: Stable margins, but treasury losses weigh
According to Ishank Gupta, Banking and Financial Services Analyst at Choice Institutional Equities, margins for most large private banks remained stable in Q4FY26 despite cumulative repo rate cuts over the past 15 months.
He noted that lending rates have adjusted meaningfully, with the Weighted Average Lending Rate (WALR) for fresh loans and outstanding loans declining significantly between February 2025 and March 2026. However, banks continue to face challenges in mobilising deposits at lower rates, reflected in a slower reduction in term deposit rates.
Gupta said Q4 earnings for both private and PSU banks were impacted by mark-to-market treasury losses due to elevated government bond yields, although stronger-than-expected credit growth partially cushioned the impact.
“Banking earning growth in FY27E is expected to be supported by sustained credit offtake across MSME and retail loans, and potential improvement in NIMs on account of repo rate hikes,” Gupta said.
He expects systematic banking credit growth to moderate to 12–13% in FY27 from 16.1% in FY26, citing softer domestic demand due to second-order effects of the ongoing West Asia conflict.
Can PSU banks outperform?
Analysts remain divided on whether PSU banks can emerge as leaders of the next banking rally.
Gupta believes PSU banks may outperform private lenders if geopolitical tensions ease.
“PSU banks are better positioned to outperform their private sector peers should the West Asia conflict reach a resolution in the near term — a scenario that would likely trigger a softening of G-sec yields and a recovery in domestic demand-led credit offtake,” he said.
A potential moderation in bond yields could ease treasury-related pressures and support earnings recovery for state-owned lenders.
However, not everyone shares the same optimism.
Why PSU banks may remain under pressure
Sunny Agrawal, Head of Fundamental Research at SBI Securities, described Q4FY26 as a “mixed bag” for the banking industry.
He highlighted that while credit growth remained healthy at over 16%, it was driven largely by corporate and SME lending, while retail loan growth remained softer.
According to Agrawal, PSU banks face additional challenges on the liability side, with deposit mobilisation continuing to remain difficult.
“Margins were in-line for the private banks, while PSU banks reported decline due to credit growth being led by low-yielding corporate loans and launch of several special deposit schemes with higher interest rates, impacting spreads,” he said.
Agrawal added that elevated bond yields could continue to hurt treasury income for PSU banks, while rising competition has forced many lenders to increase certificate of deposit (CD) and retail term deposit rates, putting further pressure on margins.
He also flagged structural concerns, including the transition to Expected Credit Loss (ECL) norms and proposed wage revisions in FY28, as key overhangs for PSU banks.
“PSU banks are expected to remain under pressure going ahead due to several factors,” Agrawal said, adding that state-owned lenders also maintain lower non-NPA buffers than private peers.
What should investors watch?
Going forward, analysts say investors should closely track the RBI’s interest rate stance amid inflation concerns, movement in government bond yields, credit growth momentum across retail, SME and corporate segments, deposit mobilisation trends and funding costs and geopolitical developments in West Asia.
For now, private banks with strong liability franchises and lower dependence on bulk deposits appear better placed to defend margins. However, PSU banks could see a tactical rerating if bond yields soften and domestic credit demand improves following easing geopolitical tensions.
In the near term, the Bank Nifty’s trajectory may hinge less on broad sector optimism and more on selective stock-specific opportunities within the banking space.
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.
