Valuations in Banking Sector Show Promise Following US-Iran Conflict-Driven Correction

Indian Banking Stocks Decline Amid US-Iran War Tensions

The Indian banking sector has witnessed a sharp decline in recent weeks, in line with the broader Indian stock market. The Bank Nifty index has fallen 10% over the past month and is down 12% on a year-to-date (YTD) basis. In comparison, the benchmark Nifty 50 has declined 8% in the last month and nearly 11% YTD.

Within the banking space, PSU banks have underperformed their private sector peers, consistent with trends observed during previous market corrections. The Nifty PSU Bank index has dropped 16%, while the Nifty Private Bank index has declined 14.5% over the past month.

Analysts believe that the banking sector valuations have turned more reasonable following the correction. The sector outlook remains constructive, supported by margin stabilization, improving asset quality, and expectations of an earnings recovery beginning in Q4FY26. Analysts at Axis Securities maintain a constructive outlook on the banking sector, citing attractive valuations and strong asset quality.

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However, the brokerage firm remains vigilant regarding the pressures posed by the geopolitical headwinds in West Asia, which could disrupt growth momentum, impact net interest margins (NIMs), and weigh on the asset quality of lenders. A prolonged US-Iran war could pose significant challenges for banks and NBFCs by keeping crude oil prices elevated, impacting economic growth through demand-side pressures.

Key Picks

Axis Securities has preferred picks in the banking sector, including:

• ICICI Bank
• Kotak Mahindra Bank
• State Bank of India (SBI)
• Federal Bank
• AU Small Finance Bank
• Ujjivan Small Finance Bank

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Among NBFCs, the brokerage firm prefers:

• Shriram Finance
• Bajaj Finance
• Can Fin Homes