Foreign capital is decisively growing in India’s private banking space, as evidenced by Japan’s SMBC’s acquisition of a significant stake in Indian lender Yes Bank, followed by Warburg Pincus picking up nearly 10% in IDFC First Bank.
The trend then extended to RBL Bank, which received funds from Emirates NBD in terms of the acquisition of a majority stake, and most recently to Federal Bank, which saw an infusion from Blackstone. In all, these deals represent over $6 billion of fresh foreign capital flowing into India’s private banking sector over the past few months.
Why are foreign banks buying Indian bank stocks?
The buying by foreign banks is indicative of the sector being at an inflexion point. While part of the foreign interest could be attributed to the Reserve Bank of India’s (RBI) favourable stance towards foreign ownership, analysts believe the larger takeaway is renewed global interest in India’s private banking space.
Vishnu Kant Upadhyay, AVP- Research & Advisory, Master Capital Services, said that the money globally is shifting towards Indian banks as the sector’s fundamentals have turned a corner with strong balance sheets, NPAs at a ten-year low, and strong credit growth.
“Besides, RBI approval of transactions shows confidence that foreign investors with strong capital infuse strength into India’s banking system and not undermine it, particularly since the industry requires capital to support economic growth,” he added.
Moreover, in the short term, the sector had been underperforming for a while, providing lucrative entry points.
Following the last quarter of FY25, concerns over slippages and rising credit costs in unsecured and micro-lending segments led to a sharp de-rating of private banks, said N ArunaGiri, Founder & CEO at TrustLine Holdings, which he believes created attractive entry valuations for foreign investors.
The Nifty Private Bank index is trading at a price-to-earnings (P/E) ratio of 19.9 times, which is below its five-year average.
What are the implications of foreign buying for bank sector?
Analysts see many positive implications of this trend for the Indian banking space. NArunaGiri said that FDI inflows, in many ways, are often precursors to broader institutional participation.
“If history is any guide, this renewed foreign investor interest could soon translate into a meaningful comeback of FIIs into India’s private banking space,” he said, adding that the banking pot is brewing hot.
Capital infusion will likely strengthen the books of Indian private lenders while providing accelerated technology adoption.
“This move could also expand their reach in retail and wealth management. Equally, they may set the stage for a wave of consolidation and strategic tie-ups, potentially reshaping the mid-cap banking landscape,” opined Harshal Dasani, Business Head at INVAsset PMS.
He believes that India’s financial sector is entering a phase of re-rating, with select private lenders emerging as the next big compounding stories.
Now, with the consumption expected to revive on the back of GST rationalisation, income-tax relief, and the RBI’s accommodative policy stance with more rate cuts, analysts are bullish on the long-term growth story for private sector banks.
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.
