Why, in spite of profit pressure, investors are sticking with banks

Highlights ◼ Despite pressure on bank profitability, the Bank Nifty has outperformed the wider Nifty for the past year. ◼Banks' consensus earnings projections for FY26 and FY27 have been reduced. ◼ Bank profitability have been impacted by pressure on margins, a slowdown in credit expansion, and new asset quality issues. ◼However, banks' market valuations are supported by an improving and recovering outlook. In the past, banking shares have been the main driver of significant gains in the equity markets. In more recent times, when sentiment was affected by global volatility, they have demonstrated calm resilience. In fact, throughout the last 12 months, the Nifty Bank index has continuously outperformed the benchmark Nifty 50. All of this has occurred despite a 5-7 percent reduction in the sector's consensus earnings projections for FY26 and FY27. Are the threats to bank earnings being ignored by investors? Banks in India have been struggling with declining interest margins and slower credit expansion, both of which have put pressure on their bottom lines. The last two quarters have seen the emergence of stress from small company and retail loans, which has further impacted banks' profitability trend. Over the past month, some of the uneasiness caused by the affected bank results has started to set in. The nearly 1% decline in the Nifty bank index makes this clear. However, the degree of moderation is not reflected in bank shares anywhere. The fact that the banking industry's prospects have not deteriorated has been a major factor. Compared to the current fiscal year, FY27 is actually expected to be better, and the recovery might start in the second half of this year. Analysts at Motilal Oswal Financial Services Ltd. noted in a note that "a turnaround appears within reach, as 3QFY26 is likely to mark the end of the current earnings deceleration cycle with earnings growth compared to a decline in 1Q and 2Q." According to analysts, the government's recent actions as well as the festive fervor usually shown in the second half would contribute to the recovery of credit growth. It is anticipated that Indians will be encouraged to borrow money in order to finance their discretionary purchases as a result of the GST cuts intended to increase consumption. Credit growth could therefore increase from the current 10–11 percent.