Are banks the new safe haven as AI jitters shake D-Street?

As AI fears shake tech, banks step up as market stabilisers

• Bank stocks rise as SBI's strong Q3 results ease AI concerns
• PSU banks see strong inflows and attractive valuations in 2026
• Analysts expect 15% credit growth CAGR for banks FY26–28

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As fears around AI disrupting global tech spending rattle D-Street, banking stocks are quietly emerging as a pocket of stability. Six weeks into 2026, bank stocks have decisively outperformed broader markets, led by a sharp rally in State Bank of India (SBI) following its stellar December-quarter performance.

While Indian IT stocks remain under pressure on concerns that rapid AI adoption could crimp traditional revenue streams, banking counters have shown remarkable resilience. Analysts attributed this outperformance to healthy credit offtake, improving asset quality, and signs that earnings downgrades may finally be bottoming out.

PSU banks lead the charge

So far this year, SBI shares have surged 21 percent and the rally has extended across mid-sized lenders as well, with Tamilnad Mercantile Bank, Karur Vysya Bank and Bandhan Bank clocking double-digit gains.

Private lenders, however, have painted a mixed picture. ICICI Bank has advanced about 7 percent, while HDFC Bank has remained under pressure.

Fund flows turn favourable

According to the latest fund folio data from Motilal Oswal, private banks saw their portfolio weight climb to an eight-month high of 18.2 percent in January 2026, as domestic mutual funds steadily raised exposure over the past 3 months.

PSU banks, meanwhile, continued to enjoy strong inflows. Their allocation surged to a 3-year high of 18.2 percent in January.

SBI’s blockbuster Q3 rekindles Street optimism

The rally has been decisively anchored by SBI’s December-quarter performance, which reignited bullish sentiment across the sector. Brokerages including Nomura, Nuvama, Motilal Oswal, Jefferies and Kotak Securities have maintained a ‘Buy’ rating on the stock, with the highest target price pegged at Rs 1,300.

Analysts praised the lender’s best-in-class core profitability, driven by strong loan growth, stable asset quality, and disciplined cost management. The management also raised its credit growth guidance and reiterated that margins would remain above the 3-percent mark.

Valuations offer downside comfort

Chokkalingam G, founder of Equinomics Research, believes the downside in banking stocks—particularly PSU lenders remains well protected, given their attractive valuations.

“PSU banks continue to trade at just 1–1.2 times price-to-adjusted book value. With double-digit credit growth and a high share of low-cost deposits, their growth story appears more compelling than that of private lenders over the medium term,” he said.

Meanwhile, analysts at Axis Securities pointed to improving growth visibility across key segments, aided by supportive macro factors such as GST rate rationalisation, income tax cuts, and a recovery in unsecured lending.

They expect credit growth of about 15 percent CAGR over FY26–28, with private banks leading at 16 percent CAGR, marginally ahead of PSU banks at 14 percent.

Overall, Axis Securities expects healthy net interest income (NII) growth of 16 percent CAGR during FY26–28.

With the December 2025 rate cut yet to fully transmit into lending rates, analysts cautioned that banks could see mild margin compression in the near term. Management commentary suggested that deposit repricing is progressing at a slower pace, which could partly cushion the impact.

As markets grapple with AI-led uncertainty, banking stocks appear to offer growth, valuation comfort, and earnings stability. For now, D-Street seems content parking money in banks until the AI fog lifts.