Vault matters | What’s behind the growing disconnect between Nifty Bank Index and reality

The obvious dilemma for retail investors is if they should lean on the Street’s optimism or on the caution still maintained by banks.

The Nifty Bank index has been the best performer among sector indices and has outdone the bell-weathered Nifty index as well by a stellar margin. This is true, whether one considers short-term performance of the bank index or even from a one to three-year perspective. While this bodes well for investors holding on to banking stocks, what’s intriguing is that the optimism which the markets seem to have on banking stocks isn’t reflected in the commentary given by those running these banks. For instance, large banks such as ICICI, HDFC and Axis declined to give any projections on how FY26 would pan out in terms of growth, whether loans or deposits.

At the margin these banks sounded positive about the petering stress in retail loans, but does that signal a strong revival in sentiments and growth, none of the banks wanted to stick their neck out on this. If any, all bankers in unison agree that FY26 is going to be a year of uncertainties given what’s happening on the trade war front and even domestically with tensions escalating in the borders. Even the recently concluded March FY25 numbers do not paint a particularly rosy picture.

While some of them held on to the Street’s target, there is no clear outperformer across any parameter. The best part is bankers appeared happy or contented with the numbers they put out even if they didn’t outshine the market expectations on any front. So, what then explains the serious disconnect between what banks think lies ahead of them in the next one year and the market optimism.

For one, whether Kotak Mahindra Bank or HDFC Bank or any of the mid-sized names, there was a massive reset in their operations particularly between mid-2022– 2024. This reflected on their stock prices which remained muted in terms of returns during this period. Now, the dust seems to have settled and a new normal has emerged, which is giving the Street confidence to bet on banking stocks. Secondly, at a macro level with India being one of the most promising growth nations globally, the expectations is that of India’s GDP grows by over six percent, banks will be the first order beneficiaries of this growth; the thumb rule is that banking sector growth is usually 2x the GDP growth.

That said, banks on the other hand have a better grip on reality. With big bang demand from India Inc remaining missing for a long time and no real signs of betterment on this front, at least 40 – 50 percent of overall loan book of banks is poised for a single-digit to mild double-digit growth in FY26. The retail segment is where banks and the Street seem to have an extremely divergent view on growth. While analysts are pegging for a return of 15 – 18 percent growth on the retail front, banks are forecasting a number much lower than this given the lack of clear visibility on the quality of retail borrowers pool.

The obvious dilemma for retail investors therefore is should they lean on the Street’s optimism or on the caution still maintained by banks. While more is merrier, now isn’t the time for exuberance. Relying on bankers’ view of reality may be less damaging on investors’ wallets.