India's banking sector celebrated a significant achievement on Wednesday, November 19, as the Nifty Bank index scaled a fresh historic peak. The benchmark for banking stocks smashed through the 59,200 barrier for the first time ever, marking a triumphant moment for investors.
Record-Breaking Rally in Banking Stocks
During intraday trading, the Nifty Bank index touched an unprecedented high of 59,264.25 points, comfortably surpassing its previous record of 59,000.50 established earlier in the week. The index concluded the session with a solid 0.62% gain, extending its impressive performance trajectory. This milestone contributes to the index's six-month ascent of nearly 7%, while its year-to-date return stands at a robust 16.5%. For context, the flagship Nifty 50 has delivered a 10% return so far in 2025.
Public sector banks emerged as the clear champions of this rally. Punjab National Bank, Bank of Baroda, State Bank of India, and Canara Bank stood out as the top performers, registering gains between 1% and 2%. Reflecting this strength, the Nifty PSU Bank index also carved a new record, climbing 1.2% to 8,584.95. In comparison, the Nifty Private Bank index showed more modest growth with a 0.4% upward movement.
Analysts Pivot Attention to Private Banks
The dominance of public sector banks isn't a fleeting trend. Over the past twelve months, the Nifty PSU Bank index has skyrocketed by 28%, dramatically outpacing the 15% growth witnessed by private banking counterparts. However, financial experts at InCred Research suggest this leadership dynamic may be approaching a turning point.
According to their comprehensive sector analysis, the next wave of structural growth in the banking industry will likely be spearheaded by large private banks rather than their state-owned competitors. The brokerage firm highlights that private banks are positioned for multi-year outperformance as the banking cycle enters a crucial transition phase characterized by firmer margins, stronger profitability, and expanding return ratios.
Competitive Advantages of Private Banks
InCred Research identifies several key factors favoring private banks. Early signals indicate an earnings inflection point, with core profitability poised for recovery starting from the second half of fiscal year 2026. The report notes that core revenue growth is expected to inflect from 2HFY26, while operating leverage drives better core pre-provision operating profit performance in coming years.
Private institutions enjoy a clear competitive edge through their structurally lower incremental funding costs - nearly 20-30 basis points below PSU banks. This advantage stems from robust liability franchises and technology-enabled distribution networks. This cost benefit is projected to enable major players like Axis Bank, HDFC Bank, and ICICI Bank to capture market share across retail lending categories, including home loans, auto loans, and unsecured credit as liquidity conditions normalize.
The research estimates that large private banks will deliver 15% compound annual growth in core revenue over FY26-28, while operating expenses increase at a slower 12% CAGR. This divergence is expected to fuel 18% CAGR growth in core pre-provision operating profit, driving structural improvements in return on assets and return on equity.
Challenges Ahead for PSU Banks
Meanwhile, public sector banks face significant structural headwinds. With the repo rate-cut cycle bottoming out, PSU banks may struggle to sustain margins in the absence of treasury gains and with minimal room for deeper MCLR cuts. The report warns that margin improvement will likely be capped due to shallow MCLR reductions so far, relatively faster attrition in investment yields, and margin-dilutive incremental spreads.
Elevated leverage is also expected to pressure return ratios, with a sharper decline in return on equity projected for PSU banks through FY27-28. For instance, State Bank of India trades at 1.1 times September FY27 core book value, with the brokerage citing balanced risk-reward due to weaker margin progression compared to consensus and risks to sustainability of non-core income.
Investment Recommendations
Within the private banking space, Axis Bank emerges as the most compelling rerating candidate thanks to reasonable valuation and potential positive surprises on credit costs. HDFC Bank is viewed as structurally better positioned to deliver volume-led growth alongside stable margins, while ICICI Bank may see valuation upside as growth accelerates and leadership uncertainties fade.
On the PSU front, the brokerage maintains a HOLD rating on SBI and REDUCE on Bank of Baroda, highlighting stretched loan-to-deposit ratios and limited rerating potential. Canara Bank and Punjab National Bank may continue to benefit from strong non-core income pools, but their scope for valuation rerating remains constrained.
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.
