Is This The BEST Time to Invest In Banking Stocks? |

Introduction and Market Context

Hi friends, in the last few days, a few global brokerages have started saying that Indian banking stocks have started to look very, very attractive. For example, Macquarie reported that banking stocks in FY28 are likely to have a boost in their earnings and therefore the banking stocks look very, very attractive.

Here, their main thesis is that the FCNR scheme has poured around $127 billion into the Indian banking companies, and this money is ready to be lent out. Therefore, banking stocks’ earnings are likely to go up by FY28. This is a slightly one to two-year term that you need to look at, and therefore banking stocks become a great opportunity as per many reports that you read.

For example, Jefferies is saying private banks and NBFCs are going to benefit because of this FCNR inflow that we have seen in the last one month or so.

The Four Pillars of Analysis

But you cannot just simply go and blindly invest your money in banking stocks, be it private or PSU. You have to understand four critical points that I am going to break down in this video:

• Number one is the performance of banking stocks in the last 1 year, 3 years, and 5 years, so that you understand the context of what has gone well and what has not gone well.
• Number two is the comparison of private banks versus PSU banks—an extremely critical point that nobody is talking about; I will talk about that in a minute.
• Third is the valuations of the banking sector—private, PSU, and overall banking sector valuations, which we will discuss.
• Finally, I will present to you the opportunities and risks in banking stocks.

By the end of this video, you will get complete clarity on what is happening in banking stocks. If you don’t know me, my name is Rahul Jain. I am a SEBI-registered research analyst. If you are new to my channel, hit the subscribe button now so that you can continue to learn with me. With that, shall we get this video cracking? Let’s go.

Historical Index Performance

Let’s start with the first point, which is the performance of banking stocks in the last 1, 3, and 5 years. Let me start with Bank Nifty. Okay, in the last one year, Bank Nifty has given 0% returns. In 2 years, it gave 1.6% annual returns. In 3 years, it gave 7% annual returns, meaning it has not even beaten bank FDs themselves, right?

The reason I was giggling about this is because if I show you Bank Nifty’s performance since inception, which is from 2003 when this index was launched, it has compounded at around 17.60%. Look at the last one year, look at the last two years, look at the last three years, and in fact, look at the last five years as well—it has not done well at all.

Now, if you are a contrarian investor, you would jump into this as an attractive opportunity because contrarian investors’ main thesis is that if something has not done well in the last three, four, or five years, then maybe that is an opportunity.

Private Sector Banks Performance

Now, let me further break it down between private banks and PSU banks and show you some mind-boggling information about what is really happening between private and PSU banks. For example, if you look at private banks, they make up around 74% of Bank Nifty, and there are nine stocks as of now in the Nifty Bank. The names are on your screen. None of these are recommendations: HDFC Bank, ICICI Bank… The reason I am showing you these company names is because I want to show you some patterns—mind-boggling patterns you will see here.

For example, let’s talk about HDFC Bank, which has got a 29% weightage in Bank Nifty, meaning if this guy moves, then Bank Nifty moves up and down on either side, right? Now look at the performance of HDFC Bank: 1 year is minus 24%, 2 years is minus 8% compounding, 3 years is minus 1%, and 5 years is minus 1%. This means over the last 5 years, if you look at HDFC Bank, people have lost money—a lot of people have lost money.

Now, why such a bad performance by HDFC Bank? I talked about HDFC Bank specifically in a particular video just two weeks back. If you have not watched that video, I would highly recommend you watch it; you will get absolute clarity about HDFC Bank.

But coming back to a few other private banks, for example, ICICI Bank, if you look at five years, it has done decently with 14% compounding. But if you look at the last one year and two years, it has not done well at all. There is nothing fundamentally wrong with ICICI Bank. If you compare HDFC and ICICI, you will see that ICICI Bank actually compounded from a PAT perspective by maybe more than 20%—I can’t remember the exact figures off the top of my head, but maybe around 20% or more when it comes to PAT.

Okay, if you look at Kotak Mahindra Bank, there is no performance at all in 5 years. Axis Bank has done decently with 10% compounding. Now look at Federal Bank, for example: 31% compounding—this has done well. I will talk about why exactly; I will come to that in a minute.

But first, let me go through the performance so that we understand the entire banking sector with deep knowledge. Look at IndusInd Bank—bad performance. AU Small Finance Bank over 5 years has done okay, decently at 11%, but the last one year and two years have been very, very flat for this particular bank. HDFC Bank in the last one year has rebounded, but overall, if you look at five years, it is not a great performance. Yes Bank, again, is not a great performance.

What you notice out of these nine companies is that except for Federal Bank and AU Small Finance Bank to some extent, all other seven banks have done badly if you look at 5 years, 3 years, 2 years, and 1 year. This is what is happening in the private bank sector, and since private banks make up 74% of Bank Nifty, Bank Nifty has not done well in the last few years.

Public Sector Undertaking (PSU) Banks Performance

Now, let me show you on the contrary the performance of PSU banks. Here are five PSU bank stocks that make up around 20% of Bank Nifty: SBI, Bank of Baroda, Union Bank of India, Canara Bank, and Punjab National Bank. Look at the performance of all five banks here. All of these have compounded by more than almost like 18%—SBI is at 26%, Bank of Baroda and Union Bank of India are at 41%, right? So you can clearly see a pattern that in the last 5 years and 3 years, PSU banks have performed like anything.

Now, a lot of people might say that you know what, this cycle is likely to get over, and private banks might take over from here on. I will come to those aspects in a minute, but I hope you have got the basic understanding of what has happened so far: private banks have not performed, PSU banks have performed, but within the private banks also, a couple of banks have done well, which are sort of mid-cap or small-cap banks, not the large banks. If you are a contrarian investor, that is a very, very good insight that you need to have right now.

Institutional Investor Activity (FII/FPI)

Now the question comes: why is it that private banks have not done well and PSU banks have done well? Let me now walk you through that insight and the mind-boggling data that I will present to you in the next 3 to 4 minutes. So far, if you are liking this video, I request you to hit the like button, subscribe to this channel if you are learning something new, and also consider joining my YouTube community, which is exclusively for members where I try to post key updates as and when they are due. Simply go to my channel, subscribe, and hit the join button.

With that, let’s get deeper into why this is happening. The first key data point that we need to understand is the FII selling in banking stocks. What you see on my screen is that as of December 2025, around 9 months back, FIIs had around ₹23 lakh 63,000 crore invested in banking stocks—financial services, you can see here.

But as of August 2026, very, very recent data, you see financial services exposure has gone down to ₹21 lakh crore, meaning what? FIIs have sold almost 10% of their banking stocks’ exposure in just the last 9 to 10 months. Heavy selling by FIIs in banking stocks is what we have seen.

I will also break it down between private and PSU banks so that you understand why FIIs are being very, very picky about banking stocks and why they have sold a lot here. That is why banking stocks are down, and you never know when FIIs might come back. So if FIIs start to buy some of these banks back, we might see some good rallies. I am not saying whether that will happen or not; there are a few risks we need to understand. I will come to that towards the end of the video.

But as of now, let me show you which banks FIIs have totally abandoned and which banks they have bought, so that you understand what is happening here, along with the rationale. I will actually show you some fundamental points as well so that you become very, very clear, and these are very good learnings for you personally to understand how to pick banking stocks. That is the entire intent of me presenting you this data.

For example, let me show you first of all. Let’s have a look at HDFC Bank here. What do you see here? In September 2023, FIIs had around 52%, which has been consistently coming down, coming down, coming down, and as of June 2026, you can see they hold around a 41% stake only. More than 10% of the selling was done by FIIs in HDFC Bank.

If you look at Federal Bank, for example, it is a completely different picture here: from 27% to almost 27%. Of course, it has fluctuated a little bit from 27% to 29%, then 28%, but if you look at the overall picture, it has remained constant. If DIIs have bought this particular bank, then that is why maybe the rally has happened here, because you can clearly see from 45% it has gone to, let’s say, 49% from a DII’s perspective.

Now, if you look at the PSU banks on the other hand, for example, I am taking the example of let’s say Union Bank. In September 2023, the FII stake was only 2.89%. Look at where it is now: 8.63%. Could this continue? Entirely possible. I will talk about fundamentals in a minute regarding what is driving this behavior.

But for example here, look at Canara Bank. Canara Bank was around 10% back in September 2023; it is now 12.68%. It used to be around 14% a quarter back, two quarters back, right? If you look at, for example, PNB (Punjab National Bank), from 2% it has moved to around 6%.

So, on one hand, FIIs have sold large private banks like the likes of HDFC and ICICI, and they have selectively bought private banks like Federal Bank or at least have remained constant. On the other hand, they have bought PSU banks.

Fundamental Metrics: NPAs and Balance Sheets

Now you will ask me another layer of question: Rahul, why so? What is so special about PSU banks in the last couple of years that FIIs have sort of increased their stakes? Let me present to you two or three data points so that you get very, very clear about banking stocks.

Number one is the gross NPAs—the bad debt of the banking companies. Here is a beautiful pattern that you will see. I have taken HDFC Bank, ICICI Bank, and Federal Bank—three private banks—and three PSU banks: Union Bank of India, Canara Bank, and PNB. What do you see here? If you go back to let’s say 2018, look at PNB, look at Union Bank of India, and look at Canara Bank. What was their gross NPA? It was around 18% for PNB, 16% for Union Bank of India, and 11% for Canara Bank. Huge debt—these companies were into huge bad debts.

Look at what has happened now. If you come down, there is a drastic improvement in their gross NPAs; they have come down to almost 2%—PNB is at 2.78% and Union Bank of India is at 2.6%, right? So, something that has drastically changed here is the gross NPA for PSU banks. Their balance sheets look much cleaner now.

If you look at, for example, HDFC Bank, actually back in 2018-19, their gross NPA was very low at 1.33%, so there is no major improvement in HDFC Bank. If you look at ICICI Bank, yes, there is good improvement—very, very good improvement from 9.6% to almost let’s say 1.44% here from a gross NPA perspective. That is why one of the reasons ICICI Bank compounded at around 14% in the last 5 years, as I showed you that data in the beginning.

Federal Bank, for example, if you look at Federal Bank here, Federal Bank did not have a lot of debt; it has been a very, very good company and a good bank so far. From 3%, it has come down to almost now 1.62%. So, a couple of points that I want to make here is that from a bad debt perspective, all the banks have improved; it is not that they have degraded, but the huge improvement that has come is in the PSU banks, which you have seen so far.

In fact, if I present you the same data for net NPA, because sometimes banks might make a lot of provisions or they might make fewer provisions, if I consider the provisions as well and look at the net NPA number, you will see that the same story is playing out here. Look at, for example, PNB etc. They used to have a 10% net NPA back in 2018, and look at where they are right now. If you look at PNB right now, it is at 0.28%—the lowest of the lot, even lower than HDFC Bank and lower than ICICI Bank. To this level, they have made provisions.

Now you will argue that these guys have written the loans off. I really do not care as an investor. If I am a new investor right now, I will see the balance sheet right now, and they have made good provisions; that is why the net NPA numbers are even lower, as you can compare here. Federal Bank is looking at 0.18%—I mean, what else could you expect from a bank? Again, these are not recommendations here, but I am sort of showing you the picture and backing it with the data so that you understand why FIIs have done what they have done.

Credit-Deposit (CD) and CASA Ratios

Now let me also talk about another extremely critical parameter, which is the credit-deposit ratio (CD ratio), which is how much of credit the bank has lent divided by how much of deposits the bank has—a very, very important parameter. What do you see as a trend here? The trend is very simple: the CD ratio across the banks has gone up in the last few years, meaning banks have fewer deposits.

Generally, banks have fewer deposits right now. Why? People are not keeping money in the banks; they are putting it in mutual funds, SIPs, and whatnot, right? Therefore, the deposits are lower and therefore the CD ratio is higher. If for a bank the CD ratio is higher, what does it tell you? It tells you that the bank has lent more, or relatively more, and deposits are less. They have less capacity to deposit more in the upcoming months and quarters; therefore, their earnings might not be great—very simple, common-sensical logic here, right?

Now, what do you see here? For example, PSU banks still have a very low CD ratio, and that is very good. For example, PNB as of now has a 73% CD ratio, Canara Bank has 78%, and Union Bank of India has 80%. I still feel that if you look at a few pockets of PSU banks, they still have a very low CD ratio as compared to the likes of HDFC Bank and ICICI Bank. Of course, there are other parameters as well, but regarding the money available to lend right now, PSU banks still have a better CD ratio as compared to the likes of HDFC Bank and ICICI Bank—a very, very important trend here. In fact, HDFC Bank once shot up to like 114% as per this data, so that was very, very bad for HDFC Bank. Investors were spooking out because this high CD ratio is not sustainable for any bank, right? So this is another fundamental factor that you need to understand.

Let me now quickly also show you the CASA ratio. This is also another trend or problem that the banks are facing right now. CASA is about Current Account plus Savings Account—how much money is in the current account plus savings account. This is the money that banks value a lot; that is why you get a lot of calls from banks saying “open an account with us.” That money you put in the bank account gets lent somewhere else, and that is how the banks make money.

What is happening here across the banking stocks is a very, very interesting trend, which is sort of a risk against the banking stocks: the CASA used to be very, very high. For example, going back to 2016, ICICI Bank had 49% CASA and PNB had 47%. Look at what is happening right now—they are all reducing. This is one of the headwinds that people have recognized when it comes to banking stocks: the CASA is shrinking, shrinking, shrinking. Banks do not have a lot of money in current accounts and savings accounts; the borrowing costs of the banks are going up because they have to fund it.

But here is an interesting point, and that is where the initial article that I showed you comes in, with Macquarie going bullish on banks. In the month of August, because of the FCNR scheme, banks now are sitting on around $127 billion of money that has poured through the FCNR scheme. Now this money is available to be lent out, so from here on, banks have a relatively good position when it comes to lending out. So you understand all of this context so that you get very good conceptual clarity on banks.

Net Interest Margins (NIM) and Profitability

The last data point that I will present to you around fundamentals is the net interest margin (NIM), which is the measure of the profitability of banks. Very quickly, I will talk about this: if you look at some of these banks, their net interest margins either have gone up or have come down.

For example, here, Union Bank of India was at 2.34% back in 2018; their profitability has gone up. Union Bank of India is now at 2.8%—an improvement. On the other hand, if you look at HDFC Bank, from 4.4% it has come down to almost what… to 3.2%. Now, for this, of course, one of the factors is the mergers; we all know because you merged two entities, their net interest margin has come down. Okay, fine, bad luck, right?

So coming back to the point here, you also have to look at these stocks very, very individually. You cannot simply say all private banks are bad, and you cannot say that all PSU banks are good. That is a very, very important consideration as a stock investor, right? I hope this fundamental wrap-up has given you a lot of insights about what is happening in the banking stocks.

Valuations and Investment Routes

Now let come to a few other important aspects, which are in terms of the valuations: where are the opportunities and what are the risks that I see as of now, so that you get a holistic picture? Allow me 1 to 2 minutes of time.

Now if you look at the valuations, here is the Bank Nifty price-to-book ratio around 1.6. Is it good or bad? So let me show you if you focus on the blue line, and this is the last five years’ trend of the valuation of Nifty Bank. What do you see here? The blue line, if you see, used to trade at around three price-to-book back in when, 2021. See how these valuations have compressed. If you come down here, as of now, it is only at around 1.66. This valuation is so attractive. If you go back and look at COVID, for example, during COVID, what was the valuation? It has gone to almost the COVID level, even lower than the COVID level for the Bank Nifty. So from a valuation perspective, is it good? I think it is very, very good as of now.

Again, I’ll talk about the risks in a minute, but now if you look at the Nifty Private Bank, the current price-to-book is at around 1.9. And if I show you the last 5 years of the trend, again look at the blue line here. What you will see is from 2.86 back in 2021, it’s come down to almost the lowest possible, which is 1.91. So if you’re a contrarian investor, you would jump onto private banks as of now because the valuations are very, very attractive as compared to four years, 3 years, 1 year, or 5 years—whatever period you look at.

Now if I talk about the Nifty PSU Bank, here what you see is the price-to-book is at around 1.1. If I look at the last 5 years, actually it has come down, but if you go back to 2021 or 2022, it used to be lower than 1; it used to be 0.66. So one could argue that the PSU banks’ valuation is slightly on the higher side. This is where possibly you will have to make an adjustment as to whether private banks is the theme that you want to play or PSU banks that you want to play.

Now within PSU banks and private banks also, you need to understand which banking stocks you want to bet on. This is very, very important because a lot of stock selection needs to happen. If you’re not very good in selecting the stocks, whenever you buy a stock, if it falls by 10% or 15% and you panic, I would suggest that either you go via the mutual fund route or you look at smallcases. For example, here, if you look at smallcases, there are a few banking-related smallcases you can see on my screen right now. These are made by SEBI-registered professionals, and the difference between mutual funds and smallcases is that in smallcases you have a concentrated portfolio—you will have between let’s say 3 to 10 or 12 stocks—while in mutual funds you might have 30, 40, or 50 stocks. So these are much more concentrated, and of course here you get a lot of variety as well.

For example, let me pick one of these here; this is let’s say based on the PSU bank theme. Now what you see here is, for example, let’s say there are around 3 to 15 stocks which are selected from the PSU bank universe, and these smallcases are periodically rebalanced. For example, here you can see the timelines that between 2023 and 2026 there were 179 rebalances done. So stocks will be added, stocks will be removed, and stocks’ weightages can also be changed—a lot of this happens in the background. If you subscribe to these smallcases, then you get all of these rebalances automatically. Just like in mutual funds you have an expense ratio that you pay out, in smallcases also you have to pay a fee. Of course, you can see the fees depending on what smallcases you’re going to go and subscribe for.

But this is one option; another example is this one here. For example, here they are talking about both private as well as PSU banks. So here they are not restricting to the PSU banks; they’re looking at private banks as well as public banks, and as per the expertise of the smallcase manager, they can decide whether a particular private bank is looking attractive or a PSU bank is looking attractive and they assign the weightages. You can go and check out how much of the large-cap, mid-cap, small-cap, etc., and how many rebalances have been happening in the last few months or quarters. These get periodically reviewed and are built by SEBI-registered professionals. So if you’re not comfortable picking banking stocks yourself, then of course there are options out there: there are mutual funds and there are smallcases that I’ve shown you. You can go and choose as per your risk appetite.

Macro Growth Indicators and Economic Risks

Now, let me come and talk about the risks in the banking stocks as of now regarding what is happening so far, so that you get a holistic picture. Allow me 1 to 2 minutes of time. Before I actually go to risks, I also want to show you something which is very, very important, which is the credit growth rate in the Indian economy when it comes to the banking sector. The credit growth slowed down between December 23 to almost let’s say August 2025. After that, in the last four to five quarters, it has picked up beautifully, and the credit growth rate right now is looking at around 19%. It could have plateaued here or come down slightly because of the oil crisis, and that is where a slight risk is there in banks. Let me quickly give you that commentary; 1 minute I will take.

So, crude oil risk right now remains a big risk for banking stocks. That is why if you go and look at Bank Nifty, you will find that it is sharply dropping, sometimes recovers back, drops again, and recovers back—that is happening right now.

Now, what is the impact of the oil crisis? Oil prices are going up; what does that mean? It means that inflation is likely to go up; therefore, RBI rates are likely to go up to control that inflation. When the RBI rates go up, two or three things will happen that are likely to impact banks as well.

• Number one is that when the RBI rates go up, a bank’s net interest margin generally should go up. Why? Because if you look at a bank’s loan book, 40 to 50% of that loan book is actually attached to the external borrowing benchmark link rate, which is the EBLR. If that goes up, then net interest margins will improve, so that is a positive for banks.
• However, there is a negative, which is the bond portfolio. The banks actually invest in bonds, and as the rates go up, bond yields also go up; therefore, banks take a hit. Here, the banks take a hit on their balance sheet, not in their profitability, so definitely it is negative, but not from an earnings perspective. This is the second impact—the first was positive, the second is negative.
• And the third one, which is a biggie, is the asset quality. So when inflation goes up, businesses struggle to survive—for example, MSMEs. Their costs will go up; I don’t know how many of them can survive, and they might skip their loan payments etc. So that might introduce a risk of NPAs going up slightly.

Conclusion and Risk vs. Reward

So these are three broad risks I have given you because of the oil shock. Now, we don’t know whether this situation of the oil crisis can be resolved very, very quickly or whether it might take weeks.

But overall, if banking stocks fall a lot from here on, then you know what, in my view, for long-term investors or even mid-term investors with a 2 to 3-year time horizon, banking stocks actually look very, very attractive because I have talked about the valuations—valuations look really, really low as of now. Further corrections will actually throw these valuations further down, and on the other hand, they are sitting on around $127 billion of FCNR liquidity which is ready to be lent, right?

Depending on how this war situation spans out and where the oil prices go, there could be volatility definitely. But overall, if you ask me about risk versus reward, the banking sector to me looks very, very good. Again, this is not a recommendation here; I have presented to you this data very, very honestly and given you the risks as well.

If you learned something new, I request you to subscribe to this channel. Check out the smallcase links; I have given you those in the description and pinned comment as well. You can explore them; depending on your risk appetite, you can read about these smallcases as well so that you understand what are the themes that they are catering to. If you are comfortable with those themes, you can go and explore those, right? I hope you enjoyed this article. I am going to see you in my next article. Until then, keep rocking!