Banking Sector Valuations

Banking stocks have witnessed a sharp decline, in line with the broader Indian stock market, since the onset of the US-Iran war in the Middle East. The Bank Nifty index has fallen 10% over the past month and is down more than 12% on a year-to-date (YTD) basis. In comparison, the benchmark Nifty 50 has declined over 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. After this correction, analysts believe the banking sector valuations have turned more reasonable. The sector outlook remains constructive, supported by margin stabilisation, improving asset quality, and expectations of an earnings recovery beginning Q4FY26.