The S&P BSE Bankex gained 5.35% on Friday, emerging the second highest sectoral gainer of the day. The market is currently in a risk-on mode, which is why all sectors and stocks that had been underperforming in the past 3-6 months have rallied, said Sonam Udasi, head, research, IDBI Capital.
Banking stocks have have been one of the worst performing sectors for quite some months now and the broad market rally has benefited these stocks.
The BSE Bankex slid 9.4% in calendar year 2013, but has gained 4% in the year to date.
The country's current account deficit fell to its lowest in four years. The CAD for the quarter ended December 2013 fell to 0.9% of the GDP to $4.2 billion, from 6.5% a year earlier. The HSBC Purchasing Managers Index (PMI) for the manufacturing sector had touched a one-year high of 52.5 in February, indicating that the worst may be over for India Inc. On Friday, the rupee closed at 61.09 against the US dollar, a three-month high.
ICICI Bank (5.97%), Axis Bank (5.92%), HDFC Bank (5.31%), Yes Bank (8.6%) and Kotak Mahindra Bank (3.4%) were the top gainers among private sector lenders on Friday. Among PSU banks, State Bank of India (4.60%), Canara Bank (1.9%), Bank of India (3.75%), Bank of Baroda (5.58%) and Punjab National Bank (3.7%) were the major gainers.
Banks have been grappling with asset quality and credit growth concerns for some quarters now, and those concerns still remain, cautioned Udasi. It will take at least two quarters for the situation to improve. Unless the country's GDP growth comes back to around 5.5% levels, it will be difficult for things to improve.
A recent report by Kotak Institutional Equities said: Weak revenue profile, high operating costs and severely stressed asset quality have resulted in a further decline in RoEs, resulting in higher capital requirement for banks. Public banks are expected to report RoEs of 11-12% in FY2015-16E compared to RoEs of 14-16% reported over FY2011-13.
In his speech unveiling the interim Budget for 2014-15, finance minister P Chidambaram had said last month that the fiscal deficit for 2013-14 would be contained at 4.6% of the GDP, well below the red line that I had drawn last year. He added that the economy was more stable today than it was two years ago.