Key Takeaways
- SBI up 21% YTD, leading a broad rally in PSU banks.
- PSU banks trade at only 1‑1.2× price‑to‑adjusted book, offering a built‑in downside cushion.
- Credit growth expected at 15‑16% CAGR through FY28, outpacing most sectors.
- Fund flows into banking hit a three‑year high, pushing portfolio weight to 18.2%.
- AI‑related tech slowdown creates a valuation gap that banks are filling.
You’ve been watching AI scare the tech sector, but banks are quietly cashing in.
Why SBI’s 21% Surge Outshines the AI‑Driven Tech Turmoil
Six weeks into 2026, the State Bank of India (SBI) has rallied 21% versus a stagnant broader market. The catalyst was a blockbuster December‑quarter that beat consensus on loan growth, asset‑quality metrics, and cost efficiency. Analysts highlight a core profit margin that comfortably sits above 3%, a level rarely seen in a high‑inflation environment. With the central bank’s rate cut still filtering through loan pricing, SBI’s earnings are insulated from near‑term margin compression, giving investors a rare combination of growth and stability.
Sector‑wide Resilience: PSU Banks Lead While Private Lenders Lag
Beyond SBI, mid‑tier public‑sector banks such as Tamilnad Mercantile, Karur Vysya, and Bandhan have posted double‑digit gains, underscoring a sector‑wide shift. The public‑sector advantage stems from a higher share of low‑cost deposits, which fuels net interest income (NII) without eroding margins. Private lenders present a mixed picture: ICICI Bank modestly up 7% while HDFC Bank remains under pressure, reflecting divergent balance‑sheet dynamics and exposure to higher‑cost funding.
Fund Flow Dynamics: What the Rising Portfolio Weight Means for Your Allocation
Mutual‑fund data shows banking exposure climbing to an eight‑month high of 18.2% in January, matching the same weight for PSU banks. This surge signals a collective re‑allocation away from tech‑heavy bets toward defensive, income‑generating assets. For portfolio construction, the trend suggests a growing appetite for the sector’s dividend yield (typically 3‑4% in Indian banks) and its lower volatility relative to the broader equity index.
Valuation Comfort: Price‑to‑Book Ratios Offer a Downside Buffer
PSU banks now trade at just 1‑1.2× price‑to‑adjusted book value (P/B). The P/B ratio measures market price against a company’s net asset value, adjusted for intangible items. A ratio near 1 indicates the market is valuing the bank almost exactly at its book, leaving little room for a steep price decline unless asset quality deteriorates sharply. By contrast, many global banks sit above 1.5×, making Indian PSU banks a relative value bargain.
Macro Catalysts: GST Rationalisation, Tax Cuts, and Unsecured Lending Recovery
Supportive macro policies are amplifying the sector’s upside. The rationalisation of the Goods and Services Tax (GST) rate eases compliance costs for borrowers, spurring loan demand. Recent income‑tax reductions raise disposable income, translating into higher consumption‑linked credit. Moreover, unsecured lending—personal loans and credit cards—is rebounding, offering higher spreads that boost NII growth. Analysts project a 15% compound annual growth rate (CAGR) in credit for FY26‑28, with private banks nudging ahead at 16% CAGR.
Investor Playbook: Bull vs Bear Cases for Indian Banking Stocks
Bull Case
- Continued credit expansion driven by GST and tax reforms fuels loan‑book growth.
- Deposits remain cheap, preserving a stable net interest margin above 3%.
- Valuations stay compressed; P/B near 1 provides upside of 20‑30% on current levels.
- AI‑induced tech volatility redirects capital toward defensive banking equities.
Bear Case
- Delayed transmission of the RBI rate cut could compress margins if deposit repricing accelerates.
- Escalating non‑performing assets (NPAs) from a resurgence in unsecured lending could erode asset quality.
- Regulatory tightening on loan‑to‑value ratios might blunt credit‑growth momentum.
- Global risk‑off sentiment could trigger capital outflows from emerging‑market equities, including banks.
For most investors, the bullish fundamentals outweigh the headwinds. Positioning a core allocation to PSU banks, with a modest satellite exposure to high‑quality private lenders, aligns with a strategy that seeks growth, income, and downside protection as the AI fog lifts from the broader market.