Reflecting on the market dynamics leading up to the correction, Haria pointed out that the financial sector had been one of the strongest pockets of the market in recent months. “See, before this, just let us rewind one week back, like the banking sector has been the best performer, like the PSU banks doing much better, private banks were suffering. But the financial sector has done quite a bit and see because of the narrow nature of the market, a lot of money which could not go into IT, IT had this whole AI related meltdown, so there was a lot money hiding in banks and autos.”
That surge in flows, he noted, pushed stock prices ahead of what fundamentals might have justified. “Maybe these sectors are doing very well fundamentally but the stock prices had gone in a much more, I would say, not a euphoric zone but they probably did a little more than what fundamentals should have justified. So, that part is just cooling off.”
Despite the recent pullback, Haria emphasized that the underlying strength of the banking sector remains intact. “I do not see anything which has gone bad with the banking sector, like except the general macros, crude oil is up, currency is a little down, these are temporary phenomenon. So, I do not think the banking system is responding to that. It is not a long-term threat.”
He expects earnings momentum in the sector to remain steady, provided geopolitical tensions do not intensify. “The sector remains fine, fundamentally very strong. The earnings will keep on improving for the next 12 months from here if this war does not prolong. So, this correction can be an opportunity.”
Within the sector, however, he sees a shift in leadership. Haria said his strategy has moved away from public sector banks after their sharp rally toward private lenders that now appear more compelling. “PSU banks have been hands down winners of the last one year, private banks have not at all done well. But next months this trade could reverse.”
Large private banks in particular are beginning to look inexpensive on traditional valuation metrics. Haria noted that the recent selloff has pushed some of these stocks to levels that appear hard to ignore. “ICICI Bank seems like it is two times on 12-month forward. It is a bank which still does 20% ROEs, grows at 15% plus. So, it is definitely cheap.”He attributes much of the weakness in these stocks to foreign investor flows rather than any fundamental deterioration. “The only reason we could really find is that see these banks were very-very FII heavy banks and last two years the FIIs have just been selling India and they will sell what they have. So, they had banks and banks, they got the beating because of that.”
If foreign institutional selling stabilizes, Haria believes the stage could be set for a meaningful rebound. “Maybe a Kotak, ICICI, HDFC all of these banks look ripe for 15%, 20%, 25% kind of rallies over next 18 months kind of a thing.”
Still, he does not expect valuation multiples to return to the peaks seen in earlier cycles. According to him, stronger competition from public sector banks will likely cap how far private bank valuations can expand. “We are not going to go back to the past multiples of three, three-and-a-half, four times. See, because the public sector bank is very healthy and they are competing.”
However, the superior profitability of private lenders continues to justify a premium. “The growth rate differential between a private bank and a PSU bank, like the best private bank grows at 15, PSU banks are growing at 12%. So, it is hardly 2–3%. But the differential is in the ROEs and as shareholders return on equity is what matters. So, in private banks you have ROEs between 16% to 20%.”
For now, Haria believes the next phase of rerating depends largely on the behaviour of global investors. “For that to happen, the FIIs have to stop selling, there is very little fundamental complaint that we have with private banks.”
Beyond the large lenders, he sees several pockets within the broader financial sector that could outperform. Regional banks, for instance, stand out on both growth and valuation metrics. “Regional banks look fantastic on value… they are growing faster than the large banks and their valuations are much cheaper.”
He also highlighted microfinance as a sector emerging from a difficult phase. “Micro lending as a sector has gone through 18 months of pain, so that itself is bouncing back. We are seeing very good data coming from the sector.”
Another area that could benefit from supportive regulatory trends is gold financing. “Gold is doing well, plus regulator has created an environment where they want gold loans over personal unsecured loans. So, gold loans will do well.”
If market conditions stabilize, Haria also expects select financial services companies to benefit from improving cycles. In asset management, however, he advised investors to remain selective given the high valuations in leading names. “If I am a value investor, I will definitely look lower, something like a Birla AMC or JM Financial, things like that make a lot more sense.”
As markets navigate volatility driven by global factors and shifting capital flows, Haria’s view suggests that the recent correction in financial stocks may ultimately provide investors with an opportunity—particularly in segments that have lagged the rally so far.