The 12-share Nifty Bank index gained 1.3% on Wednesday to end at a record closing high of 41,405. The index is up 13.1% in the last one year.
The gains in banking scrips helped the market in recovering the lost ground, with Sensex rebounding more than 1,200 points from the early lows to settle at 60,346.97 points. The recovery in the benchmarks was led by IndusInd Bank, SBI, Kotak Mahindra Bank, ICICI Bank and HDFC Bank.
India’s largest public sector lender SBI hit a record high of Rs 574.85 on the NSE as it became only the third bank after HDFC and ICICI Bank to hit Rs 5 trillion in market capitalisation.
Over the past two years, Indian bank stocks have returned to average valuations as the economy improved. Stocks that were not pricing in credit cost normalisation did well and drove the first leg of re-rating. This was helped by strong improvement in India banks’ balance sheets over the past five years despite the Covid crisis. The next leg of re-rating should be driven by loan growth acceleration.
“Strong balance sheets, lessening macro concerns, and improving capacity utilisation set the stage for a capex up-cycle in FY24-25, which we think could drive a second leg of re-rating at Indian banks,” said Morgan Stanley in a recent report.
The foreign brokerage has raised its estimates and price targets for banks, and prefers banks with liquidity/liability franchises that appear best placed to deliver profitable revenue growth.
“Unlike in past cycles, we believe retail deposit competitive intensity will be high, and ability to gain deposit market share will be key. Large banks with higher liquidity and ability to gain deposit market share are best placed to capitalise,” the brokerage said.
According to Deepak Jasani, head of retail research at HDFC Securities, banks are on a good wicket on the back of good credit growth, stronger balance sheets and abating macro-economic concerns.
“If India sovereign bonds get included in global bond indices, then foreigners will come here to buy government securities driving down yields and pushing up prices. Banks are holding a large portfolio of G-secs and they can book mark-to-market (MTM) gains on them.
Credit Suisse expects Indian banks to see strong NIM (net interest margin) improvement over the coming quarters, on the large share of floating-rate loans and an increasing share of loans linked to external benchmarks, which have increased 140-190 bps over the past six months, even as retail deposit costs have increased by 40-90 bps.
“We increase our NIM estimates for FY23E by 20-30 bps for the larger banks. While a large part of the increase in NIMs is driven by the benefit of rising rates and shift to external benchmarks, banks are also benefiting from the mix change, as loan growth has been led by retail and SME segments versus lower-yielding corporate loans. Also, within retail, unsecured loans have seen strong growth trends,” the brokerage said.
Net interest margin is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders, relative to the amount of their assets.
The Nifty IT index, meanwhile, continued to remain under pressure and corrected another 3.4% on Wednesday. With geopolitical uncertainties, and recession fear, Indian IT stocks have corrected by 20-40% in H1CY22. Despite correction, companies are still trading at a premium to long-term average multiple, according to experts.
“Spending on IT may take a back seat in developed economies particularly in Europe where the current energy crisis and inflation may tip several economies into recession,” said Jasani.