Small lenders steal the show as big banks lag in Q2 rally

Mumbai: Smaller banks left their larger peers behind in the April–June 2025 quarter, outperforming benchmark indices and driving up the collective market capitalization of the sector, according to a report by S&P Global Market Intelligence.Of the top 20 Indian lenders, 18 recorded gains in market cap, including all three of the country’s biggest banks. However, the real action was at the bottom of the pecking order, where smaller players clocked double-digit returns, while large private and public sector banks mostly underperformed the broader Nifty 50 index, which rose 8.5% during the quarter. The Nifty Bank index fared slightly better, gaining 11.1%.AU Small Finance Bank led the pack with a staggering 53.05% increase in market cap, followed by IndusInd Bank (34.2%) which gained after the regulator indicated that most of the issues relating to derivative losses have been addressed. IDBI Bank gained 33.11% while Canara Bank rose 28.31%. These gains came amid improved asset quality, easing interest rates, abundant liquidity, and improving sentiment in global equity markets.

India’s largest lender by market cap, HDFC Bank, posted a 9.7% rise — just above the Nifty — while ICICI Bank and State Bank of India gained 7.43% and 6.33%, respectively. Kotak Mahindra Bank, the fourth-largest by market cap, bucked the trend with a 0.35% decline.Among public sector banks, Union Bank of India surged 21.73%, Indian Bank gained 18.87% and Bank of Baroda rose 8.86%, narrowly beating the Nifty.At the other end of the spectrum, UCO Bank posted the sharpest drop, shedding 9.24% of its market value.

Bank of Maharashtra gained 23.2%, while Indian Overseas Bank barely moved, up just 0.03%.Market performance was buoyed by the Reserve Bank of India’s 100-basis-point cut in benchmark rates since February and its ongoing efforts to enhance system liquidity. These included lowering the cash reserve ratio (CRR) and prompting banks to reduce deposit rates.Still, challenges remain. Credit growth has slowed sharply with RBI data pointing to a 9.9% drop in May 2025, down from 16.2% a year ago.

GDP growth for FY2025 is forecast at 6.5%, the same as last year."Over the past few months, the RBI has taken significant measures to enhance system liquidity and ease regulations to drive credit growth. We expect system credit growth to improve to 12% by the end of the current fiscal year in March 2026," said Nomura in a note dated June 25.