BT Explainer: Why large private bank stocks are lagging PSU banks; key reasons & target prices

A recent sharp selloff in large private banks and relatively strong performances by PSU banks have made many investors take note. The PSU Bank index has delivered a solid 33 per cent stock return in FY26 so far against Nifty Bank's 2 per cent drop. The case has been prominent with some of the large private banks, which delivered muted stock performance in since April 1, with both ICICI Bank Ltd and HDFC Bank Ltd seeing 7 per cent and 16 per cent falls against 24 per cent and 6 per cent compounded returns over the prior two years.

These two stocks in fact are now trading close to the lower end of the three-year and two-year valuation range.

Why are large private bank stocks lagging? While large private banks remain the most preferred franchises, given their balance sheet strength, earnings visibility, and superior risk management, a watchful stance persists due to relatively slower loan growth, intense competition for deposits, and the resurgence of PSU banks, which makes market share gains more challenging, said MOFSL.

The brokerage said the ongoing geopolitical situation, coupled with concerns over business growth and medium-term asset quality, has affected investor sentiment and triggered selling in private banks, which are heavily owned by foreign investors. 

MOFSL noted that the widening opportunity set within BFSI has reshaped how investors approach the sector. Historically, wealth creation in financials was largely driven by a few dominant large-cap private banks and NBFCs, prompting many large investors to hold these names for extended periods in a largely passive investment strategy, it noted.

"However, as market-cap creation spreads across emerging financial platforms, capital-market players, and specialized NBFCs, identifying the right investment opportunities and assessing the business outlook have become increasingly critical," it said. 

Global banks see similar trend Large Indian private banks are not alone. MOFSL noted that large global banks have also witnessed volatile performance over the past 6-12 months amid macro uncertainties and geopolitical disruptions. While banks such as HSBC and Commonwealth Bank of Australia (CBA) have delivered strong 3-6 month returns, several large global banking institutions, including JPMorgan, Bank of America, and Wells Fargo, have witnessed negative returns over the past three to six months. This divergence reflects the impact of global disruptions, including higher interest rate volatility, slowing credit growth expectations, geopolitical risks, and concerns around economic slowdown, MOFSL noted.

In the case of India, even in the three months of 2026, private lenders such as IDFC First Bank Ltd, HDFC Bank Ltd, Kotak Mahindra Bank Ltd and YES Bank have seen steep drop of 14-26 per cent. Many PSU banks such as Union Bank of India, Indian Bank, State Bank of India and Bank of Maharashtra fared well during the period, rising up to 17 per cent.

Will the trend sustain? MOFSL said it views the selloff phase as a transient one, as overall fundamentals remain strong for large private banks, and a recovery in earnings growth over FY27E should support improved stock performance, it said.

"This has made large private banks increasingly attractive, with current valuations indicating a more favorable risk–reward phase over the medium term," it said.

On PSU Bank, MOFSL said, they have emerged as some of the strongest performers within the banking sector, supported by an improving growth outlook, robust asset quality, and sustained profitability. 

This operational turnaround is reflected in individual stock performance as well, with most PSU banking stocks delivering robust returns. SBI delivered 34 per cent returns during FY26YTD and continues to remain the preferred name for investors, given its liability strength, strong underwriting ability, and consistent earnings delivery, MOFSL said.