The banking and financial services sector has always been a favourite of foreign institutional investors (FIIs). This sector pulls in a major share of FII’s investments when times are good; and on the flip side, witnesses some of the worst selloffs when FIIs are bearish on India.

For instance, during the quarter ended June 2025, the net equity investment by FIIs stood at ₹38,668 crore. Having said that, their net investments, during this same period, in financial services, including banks, stood at ₹66,161 crore. This implies that FIIs were piling into the banking and financial services sector aggressively.

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However, the tables have turned in the current quarter. FIIs have already dumped equities worth ₹64,589 crore, and out of that, around ₹29,188 crore is linked to banking and financial services stocks. (Source: NSDL)

That said, the Nifty Bank Index surged by almost 14% during the past six months, even amidst such volatile market conditions.

And this brings us to two “Nifty Bank stocks” that FIIs heavily invested in during the June quarter.

Let’s try to understand what made FIIs pour heavily into these 2 bank stocks.

#1 IndusInd Bank Limited (INDUSINDBK)

IndusInd Bank Ltd. is the 5th largest private sector bank according to market capitalization, catering to the needs of both retail and corporate clients. It has a diversified portfolio of loan products and deposits. The customer base for the bank stood at 42 million at the end of July 2025, up from 41 million in May 2025.

The FIIs increased their holding in this private bank by a significant 4.15% points during the June quarter, taking the total holding to 33.7% at the end of Q1FY26.

Through the crisis

This increase in FII holdings comes at a time when the bank has been engulfed by one issue after another. In late 2024, the bank was under the microscope for accounting policies related to its derivatives portfolio. This ultimately led to recognition of losses and senior management resignations.

This was followed by suspected insider trading by some company management personnel, which led to SEBI taking action. And add to this the company initiated an internal review of its microfinance and unsecured lending portfolios to address potential issues.

While all this was happening, the stock price of IndusInd bank took a knock. Perhaps, taking advantage of the relatively cheaper valuations, FIIs poured money into this bank. Another reason to back up this conviction could have been the growth prospects of the bank.

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Growing Business

The interest income earned by the bank went up from ₹10,634 crore in Q4FY25 to ₹12,264 crore in Q1FY26, growing at 15.3% QoQ. The other income went up from ₹709 crore to ₹2,157 crore during the period, taking the total income from ₹11,343 crore to ₹14,420 crore during the period.

Another factor that FIIs might have anticipated is that the bank has reversed its net loss of ₹2,329 crore during Q4FY25 to a net profit of ₹604 crore in Q1FY26.

The net interest income (NII) grew 52% Quarter-on-Quarter (QoQ) to ₹4,640 crore in Q1FY26. However, the total amount of deposits with the bank dropped by 3% QoQ to ₹3,97,144 crore. Similarly, the loan disbursed during the quarter declined by 3% QoQ to ₹3,33,694 crore.

Key Ratios

Coming to the key ratios of the bank…

The Net Interest margin (NIM) grew by 121 basis points (bps) QoQ to 3.46%. The Return on asset (ROA) jumped by 219 bps QoQ to 0.45% and Return on Equity (ROE) surged by a whopping 1,783 bps to 3.71% during the quarter. Note: oth ROA and ROE turned negative during Q4FY25, owing to the losses incurred by the bank. Hence the big improvement in numbers.

However, the net non-performing asset (NPA) increased during the quarter from 0.95% in Q4FY25 to 1.12% in Q1FY26.

Premium valuation

IndusInd Bank is currently trading at a premium as its price earnings (PE) ratio is at 58x, while the industry median is only 12.4x.

The Price to Book Value (PBV) ratio of the bank is 0.9 compared to the industry median of 1.4.

1-Year Share Price Chart of IndusInd Bank

#2 AU Small Finance Bank Limited (AUBANK)

AU Small Finance Bank Ltd. is the 7th largest private sector bank as per market capitalization, offering a wide range of banking and financial services. It is mostly engaged in retail banking, treasury business, and also in wholesale banking and other financial services. As of June 2025, the customer base of the bank stood at 115.8 lakhs, up from 113.4 lakhs in March 2025.

During Q1FY26, FIIs increased their stake in this bank by 2.1% points, taking the total holding to 37.7% by the end of the quarter.

Business Growth

Perhaps, the primary reason for FIIs investing in this small finance bank is its growth trajectory. During Q1FY26, the bank’s interest income was ₹4,378 crore, 3% more than Q4FY25’s ₹4,271 crore. The other income also grew 7% from ₹761 crore to ₹811 crore during the period.

However, the net interest income for the period stood at ₹2,045 crore, marginally down by 2% from Q4FY25’s ₹2,094 crore. The NIM also declined by 38 bps to 5.4% from the previous quarter’s 5.8%.

Having said that, the net profit for the period increased to ₹581 crore, from ₹504 crore recorded in Q4FY25, growing at 15% QoQ.

The total deposits of the bank grew by 2.8% QoQ to ₹1,27,696 crore, while the gross loan portfolio during the quarter went up to ₹1,17,624 crore, growing at 1.7% QoQ.

Key Ratios

The net NPA increased from 2.28% in Q4FY25 to 2.47% in Q1FY26, which indicates a marginal decline in asset quality.

The ROA increased from 1.4% in Q4FY25 to 1.5% in Q1FY26, and the same goes for ROE, which increased from 11.9% to 13.3% during the period.

Universal bank license

AU Small Finance Bank is the first Small Finance Bank to get an in-principle approval for converting itself from a small finance bank to a Universal Bank. This is a big change in the nature of the bank, and one, if well executed, opens up a plethora of long term opportunities for it.

Premium valuation

This stock is also trading at a premium as its P/E is at 24.2x, while the industry median is at 17.2x. Even the Price Earnings to growth ratio (PEG) is higher at 1.05 compared to the industry median of 0.36.

The PBV ratio of AU Small Finance is 3.1, while the industry median is just 1. This clearly indicates that the market has given the bank a premium valuation.

1-Year Share Price Chart of AU Small Finance Bank

Wrapping up

FIIs have generally been aggressive sellers of Indian stocks. And not surprisingly they have generally exited bank stocks as well. However, in Q1FY26, they have gone all in on buying into banking and financial services stocks. Topping the list, within the Nifty Bank list of stocks, are IndusInd Bank and AU Small Finance. Both peculiar choices. IndusInd is dealing with regulatory and compliance issues, while AU Small Finance is now starting to make its transition to a universal bank.

Whether these calls were right, only time will tell.

We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information. 

Disclaimer:

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Maumita Mitra is a seasoned writer specializing in demystifying the world of investment for a broad audience. She has a keen eye for detail and a knack for explaining complex financial concepts in the simplest manner possible. 

Disclosure: The writer and her dependents do not hold the stocks discussed in this article. 

The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein.  The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors.  Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.