The Banking Sector: Time for a fresh look?

The Indian banking sector continues to underpin the nation’s growth, thanks to its strong capital buffers, stabilizing asset quality and improved lending practices. Digitalization and the uses of Artificial Intelligence (AI) are helping to strengthen internal operations and risk management and also to deliver improved customer experiences#. Moreover, India’s large banking sector comprises of several PSU and Private Banks, providing investors several options to capitalize on the growth of the sector.

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Policy support in the form of rate cuts by the RBI this year has improved the outlook for the banking sector and the broader economy. This has also led to an uptick in credit growth – an encouraging sign after several months of slowing growth (see chart below). Financing demand from banks may remain supported as several government initiatives to spur higher consumption including income tax and GST reforms take effect. Such a backdrop may be supportive of the banking sector going forward.

Credit growth is showing signs of recovery

Valuations of the banking sector are close to their long-term average

Valuations for the sector remain slightly close to their long-term average, unlike the broader market indices that trade at a moderate premium. The P/B (Price to Book ratio) of the Nifty Bank Index was 2.1x as of November 28, 2025, compared its 14-year average at 2.2x. With recent policy support and strengthening credit growth, the banking sector may be emerging as an appealing long-term investment opportunity.

Within the banking sector, valuations of both PSU and Private banks are close to their long-term average. The P/B of PSU Banks was 1.3x and of Private Banks was 2.4x, with their long term (14-year) average P/B at 1.1x and 2.6x respectively, as of November 28, 2025.

CAGR of Banking sector indices and Nifty 50

Over the 5-year ending November 2025, the CAGR was 41.8% for Nifty PSU Bank TRI, 15.9% for Nifty Bank TRI, 12.5% for Nifty Private Bank TRI and 16.5% for Nifty 50 TRI.

Why ETFs and Index Funds may be an efficient way to get exposure to the banking sector vs. selecting individual banking stocks?

Investors may consider the ETF (Exchange Traded Fund) route to get exposure to the Banking sector. A single ETF gives the investor sector exposure to multiple banking stocks, which reduces the need for individual stock selection.

Advantages of getting exposure to the banking sector via ETF are:

• Less impact of company-specific risk
• Capture performance of the sector with lower volatility than its underlying constituents

As seen in the chart below, the 1-year annualized volatility of the Nifty Bank Index is lower than each of its constituents, making the ETF route a smart way to get exposure to the underlying constituents with reduced volatility.

1-year annualized volatility of NIFTY Bank Index is less than its constituents

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