Why Are Banks Underperforming

TOCK prices today are an indicator of tomorrow's profits.

- RAJAS KELKAR

Of all the sectors, share prices of public and private sector banks carry a lot of weight. The banking and financial services segment accounts for a third of the NSE Nifty value. Lately, though, the weight of the banks in the benchmark indices has declined. It is probably the lowest seen in five years.

The Nifty Bank index has underperformed the Nifty 50 in 2024. Despite India being the fastest-growing large economy and promising financialization of savings on a large scale, stock market investors are not excited about the prospects for profits in the sector.

In the first quarter of 2024-25, there is a visible decline in the net interest income growth of banks, according to India Ratings, an affiliate of the global credit ratings agency, FITCH. The agency blames slower loan growth at 13.9% in the first quarter compared to 16.3% in the year-ago period. Banks also struggle to maintain deposit growth as it lags behind loan growth. As a result, banks must increase deposit rates to retain money from depositors. That probably explains the pressure on bank profits.