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below the Perspective on Nifty Bank Index scaling record high by Mr. Rohan Mandora, Analyst, Equirus Securities 

Rally led by the leaders

A stronger than expected results from the segment leaders - ICICI & HDFC bolstered the Nifty Bank index to record high levels. The earnings scorecard was marked by positive surprises on NIMs, and asset quality. The sentiment is further buoyed by the central bank's intent to maintain comfortable systemic liquidity. PSU Banks' improved profitability and progress on governance reforms is also supporting the Banking index.

Some challenges in H1FY26
H1FY26 may pose some challenges for banks, as the transmission of a 50 bps repo rate cut is expected in Q1, with an additional 25–50 bps cut likely in FY26. Large private banks - HDFC, ICICI, and Axis have already reduced their savings deposit rates by 25 bps in April 2025. Some have also cut peak term deposit rates by 5–40 bps—partially mitigating NIM compression. NBFCs on the contrary will be a beneficiary as their cost of funds would fall.

Limited signs of froth
While valuations have expanded in the wake of the rally, they remain meaningfully below historical peak multiples, indicating limited signs of froth. Asset quality is expected to remain stable overall, though certain segments such as microfinance, unsecured business loans, and credit cards may continue to see elevated credit costs in Q4. We anticipate a more favorable environment for financials, supported by improving business momentum and macro tailwinds from H2FY26 onwards.

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