Private bank ETFs back in focus as valuations turn attractive

Mumbai: Equity investors eyeing a thematic bet with quality stocks could consider an exposure to the private bank ETF given the reasonable valuations, improvement in margins, high credit growth and low NPAs . The Nifty Private Bank Index rose 11.89% since April 1, higher than the Nifty 50 rise of 5.8%. Over the past one year, the gauge is in line with the Nifty. During the period, it lost 1.37% compared to the Nifty 50 that lost 4.25%.

However, over a three-year period, it underperformed, gaining 5.81% versus the Nifty's 7.93%. The top 5 constituents of the private bank index are HDFC Bank, ICICI Bank, Axis Bank, Kotak bank and Federal Bank, accounting for 87% of the portfolio. It trades at a price to book of 2.07, compared with the 10-year average of 2.9.

Read more: Sebi plans a wider investment play for portfolio managers


"Most private banks have de-rated over the past two years primarily driven by heavy FII selling in the last 18-24months, and are thus available at multi-year-low valuations. We believe large private banks are cheap, and we expect a re-rating given the improvement in earnings," says Neelesh Surana, chief investment officer, Mirae Asset MF.

Analysts point out investors stayed away from banks on account of pressure on net interest margins (NIMs) due to the faster repricing of loans than deposits in a reducing repo rate environment. With credit growth running ahead of deposit growth, banks had to fund the incremental requirement through borrowings at higher rates than deposits thereby putting pressure on margins.

'Margin Woes Behind'
"We believe the trough in NIM is already behind us, and going forward, margins should stabilise, largely aided by a better advances mix.," adds Surana.

On the growth front, fund managers expect strong credit growth in the coming year. A study by DSP Mutual Fund points out that credit growth is in an active recovery phase. Outstanding credit growth has moved through a full cycle since mid-2021, troughing at 9.0% around mid-2025 before reaccelerating to 17.7% by June 2026, which is 1.7 times nominal GDP growth.

"India's nominal growth trajectory remains strong, credit demand is expected to be firm with credit demand for capex & infrastructure creation on rise. We expect a 16-18% credit growth potential. This expected growth gets a comfort based on the overall deposits raised under FCNR scheme," says Krishna Sanghavi, chief investment officer - equities, Mahindra Manulife Mutual Fund.

Wealth managers believe investors could use any weakness in markets on account of FII selling to accumulate private banks with a 2-3 year view keeping an eye on margins. "Private banks show a widening gap between fundamentals and price. Such gaps have historically closed as headwinds fade, though timing is uncertain and near term pressures, chiefly margins and funding costs are worth monitoring," says Rutveek Shah, senior product manager, DSP Mutual Fund.