Banking Stocks in a Bind:

Banking Stocks Under Pressure: Growth Slowdown Takes a Toll

Banking stocks, once a favorite among investors, have struggled to keep pace with the broader markets, despite their dominant presence in the Nifty 50. Over the years, the sector has witnessed a shift from being a high-growth play to a value-driven sector, significantly impacting stock valuations.

Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, believes that for banks to regain their former glory, robust growth is essential. According to him, banks must grow at 1.5 times the nominal GDP—both in revenue and earnings—to justify premium valuations. Unfortunately, he sees little chance of this happening in FY25, citing profitability at a cyclical peak and credit costs rising from historically low levels.

Why Are Banking Stocks Struggling?

1) Growth Slowdown in Key Players

A key factor behind the banking sector's valuation contraction is the dramatic slowdown in loan growth. Gupta pointed to HDFC Bank, which consistently grew at 20% annually for three decades, but has now slowed to just 3%.

• This sharp deceleration raises concerns about whether Indian banks can sustain past growth levels.

• Without a strong loan growth trajectory, banking stocks risk losing their premium multiples, making them less attractive to investors.

2) Rising Credit Costs and Profitability Challenges

Gupta warns that credit costs—expenses related to loan losses—are rising from historic lows. This means:

• Higher provisioning for bad loans, impacting profitability.

• Banks will struggle to expand margins, making earnings growth more difficult.

As a result, FY25 might not see a strong banking sector revival, unless external factors—such as RBI intervention—play a role.

3) Sector Transition: From Growth to Value

Historically, private banks were viewed as high-growth stocks, often outpacing GDP by 1.5 to 2 times.

• Leading private banks grew loans by 20-25% and earnings by 18-20% annually.

• However, that growth engine has slowed, with changes in balance sheet structure and deposit growth trends weighing down the sector.

With banks no longer enjoying rapid expansion, investors are re-rating the sector, making it trade at lower valuation multiples.

4) Underperformance vs. Nifty 50

The Bank Nifty has consistently underperformed the broader markets:

• Year-to-date: Down 3.3%, while Nifty 50 has fallen 1.5%.

• Over the past year, two years, and three years, Bank Nifty has trailed behind, highlighting the sector’s struggles.

This prolonged underperformance suggests that investors are skeptical of a near-term turnaround.

Can the RBI Spur a Banking Sector Rebound?

Despite these concerns, Gupta sees a potential silver lining—the Reserve Bank of India’s monetary policy actions.

• If the RBI takes measures to boost deposit growth, banks could regain momentum.

• Increased liquidity in the system may encourage higher loan disbursements, supporting a gradual sector recovery.

However, without a clear catalyst, banking stocks may continue to lag the broader market.

Outlook: What Lies Ahead for Banking Stocks?

The key takeaway from Gupta’s analysis is that growth recovery is crucial for banks to reclaim investor confidence. In the absence of:

✅ Stronger loan growth,
✅ Earnings expansion, and
✅ Supportive monetary policies,

banking stocks could remain under pressure in the near term.

Investors looking at this sector must keep an eye on:

📌 Policy announcements from the RBI,
📌 Deposit growth trends, and
📌 Credit cycle developments.

For now, Bank Nifty’s underperformance is a reflection of investor caution, with a sector-wide rebound hinging on macroeconomic recovery and policy shifts.