Playing the financials space smartly with Nifty Private Bank Index

As a lifeline of a growing economy, banking is a key sector that helps take credit access across the country, drives financial inclusion, and helps mobilise capital for people and institutions. Within the banking segment, private banks stand out on multiple metrics and factors. Private banks make a strong case for investments over the long term. Consider this. In the Nifty 50, private banks carry 28 per cent weightage as of June 2025.

However, going by FY25 net profits, private banks account for 37 per cent of the total profits of the Nifty 50, indicating their superior performance. Private banks tend to deliver high profitability, growth in deposits and loans, have healthy capital buffers, and enjoy robust asset quality. For investors, taking exposure to the best private banks can be conveniently done via an index fund tracking these firms, and the Nifty Private Bank is the ideal benchmark for long-term investing.

Why private banks shine
As mentioned earlier, four key factors make private banks stand out -
Solid profitability: Private banks have strong net interest income (NII) – the difference between interest earned from assets (loans) and interest paid on liabilities (deposits). In FY25, private banks had an NII in excess of Rs 3.5 trillion, which more than doubled from FY20 levels. Their NIM (net interest margin), which is the ratio of their NII to average interest-earning assets, has also been steadily increasing. From 2.6 per cent in FY15, NIM has risen to 4.6 per cent in FY25, according to data from Bloomberg.
Rising deposits, loans market share: The loans market share for private banks has been steadily rising over the past couple of decades. According to Bloomberg data, the loans market share of private banks nearly doubled from FY15 levels to 36 per cent in FY25. Over the past decade, deposits market share has also doubled from 16 per cent in FY15 to 32 per cent in FY25.
Sturdy capital adequacy: One key metric to assess banks’ financial health and their ability to absorb losses is the capital adequacy ratio. The RBI has mandated a minimum requirement of 11.7 per cent as capital adequacy ratio, including a capital conservation buffer of 2.5 per cent and an additional requirement of 0.2 per cent in the case of domestic systemically important banks. Bloomberg data shows that private banks have a capital adequacy ratio way in excess of legal requirements, at 17.29 per cent in FY25.
Healthy asset quality: Private banks have demonstrated their strong asset quality over the years by sharply reducing their non-performing assets (NPAs). The net NPA figure for private banks has fallen from 1.5 per cent in FY20 to just 0.5 per cent in FY25, according to Bloomberg data. Overall, on all key metrics, private banks stand out with their positive showing over the years.

Taking the passive route
The Nifty Private Bank index is an ideal vehicle for investors to take exposure to the segment. This index comprises the top 10 private banks sorted by their market capitalisation. These stocks are picked from the Nifty 500 index and are rebalanced semi-annually. From both long-term performance and valuation perspectives, the Nifty Private Bank index scores well.

When price-to-earnings and price-to-book multiples are taken, the Nifty Private Bank index is at a more attractive level compared to the broader bluechip index. The Nifty Private Bank TRI trades at a PE of 18.1, while the Nifty 50 TRI is more expensive, at a PE multiple of 23. Even the PB ratio is lower for the Nifty Private Bank index, at 2.5, compared to 3.7 for the Nifty 50 TRI, going by NSE data as of June 30, 2025.

When 5-year rolling returns are taken over the 20-year period (July 2005-July 2025), the Nifty Private Bank TRI has delivered mean returns of 17.1 per cent, much higher than the Nifty 50 TRI’s 12.3 per cent over the same period. This data indicates superior performance over the long term.

In the last 10 calendar years from 2016 to CYTD2025, the Nifty Private Bank index has beaten the Nifty 50 in six of those years. For retail investors seeking a simple and cost-effective way to participate in the market, index funds offer a compelling option. The SIP mode of investing is also available for long-term fund exposure.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.