A recent analysis by Nomura, following meetings with 25 institutional investors across Singapore, Hong Kong, and Kuala Lumpur, indicates a clear preference among Foreign Institutional Investors (FIIs) for large private sector banks in India. The report, dated May 19, 2026, highlights superior earnings visibility, robust provision buffers, and favorable valuations as key drivers behind this inclination.
Private Banks Attract Strong FII Interest
Nomura's findings reveal that FIIs are most constructive on ICICI Bank, recognizing its franchise quality and consistent earnings. Incrementally, higher interest was observed in Axis Bank and Kotak Mahindra Bank (KMB), attributed to their inexpensive valuations and a noticeable recovery in asset quality.
Mid-Tier Banking Preferences
Within the mid-tier banking segment, Federal Bank emerged as a preferred choice, lauded for its consistent delivery since Mr. Manian assumed leadership. IDFC First Bank also garnered positive attention, particularly after posting strong fourth-quarter numbers despite facing fraud-related impacts.
Caution Flags for HDFC Bank and Public Sector Lenders
Despite HDFC Bank Ltd. being viewed as compelling on valuations—estimated at 1.5 times its FY28 book value—investors remain cautious. This hesitancy stems primarily from the Chairman's exit and the uncertainty surrounding the Managing Director & CEO's renewal.
Uniformly Cautious on PSU Banks
Sentiment towards Public Sector Undertaking (PSU) banks was uniformly cautious among FIIs. Nomura noted a significant shift from a previously mixed positioning. Key concerns include soft Net Interest Margins (NIMs), pressure on loan growth, moderate-to-sharp erosion of Liquidity Coverage Ratio (LCR) buffers in the fourth quarter, and a higher Expected Credit Loss (ECL) burden compared to their large private sector peers.
Macroeconomic Headwinds and Deposit Growth Concerns
Overall, FIIs maintain a cautious stance on India's broader economic landscape. Elevated crude oil prices due to the West Asia conflict are keeping macro tail risks alive. Foreign investors also expressed concerns that if the lagging deposit growth—12-13% year-on-year compared to credit growth of 16% year-on-year in FY26—persists, it could lead to downside pressure on credit growth. This imbalance risks intensifying liability competition, forcing higher term deposit rates and increased Certificate of Deposit (CD) issuance, potentially negating the repricing tailwind that supports NIM recovery. Furthermore, a wider current account deficit (CAD) and rupee pressure are weighing on sentiment, with outflows reflecting selective trimming rather immense rather than fresh conviction buying.