Stocks of private sector lenders are looking less attractive compared with public sector peers, NBFCs and wealth management firms, according to industry participants.
As of May end, mutual fund holdings were highest in the financial sector at Rs 13.78 lakh crore, according to Prime MF Database.
Alok Agarwal, head of quant and fund manager at Alchemy Capital, said the banking sector appears to be highly over owned. A pick-up in the deposit growth could enhance prospects for private lenders, Agarwal said, adding that within the financial sector, NBFCs and capital market stocks are relatively better positioned. According to him, three key factors in the banking sector—credit growth, margins and credit costs – are currently not showing a meaningful upside.
Manish Goel, founder and director of Equentis Wealth Advisory, believes 30-35% of a portfolio has to be in the BFSI sector, well aligned with the overall economic growth, to achieve outperformance. He said, “Wealth management has been our favourite, it has done really well, NBFCs are turning everyone’s favourite because there is going to be a lot of liquidity in the system and good regulations by the RBI.”
Goel believes the public sector is likely to do better than the private sector because of maturity and the valuation difference. In the private sector, there are a couple of good stories, but at a basket level, they are not showing right signs of growth, he said.
Agarwal said a falling interest rate scenario could be beneficial for NBFCs. On private banks, he said, “There seems to be a gap between expectation and delivery.” In his view, financials (banking), FMCG and IT that led the markets in the previous decade are seeing a slowdown in earnings. These sectors carry a significant weight in the main indices, he said.
A report by Ashika Institutional Equities said the first quarter of FY26 is likely to reflect the transitory pain of monetary easing. However, the building blocks for a recovery are in place amid improved liquidity, rural rebound and policy support. “We believe 2HFY26 would deliver a stronger earnings trajectory for banks and NBFCs,” it said.