Financial stocks have been on a roll in the last couple of months, thanks to improving fundamentals, healthy June quarter earnings and anticipation of healthy lending margins going ahead.
Nifty Bank is up 11% year-to-date (YTD) against a 3% rise in benchmark Nifty. The Nifty Private Bank index has gained 12% while the Nifty PSU Bank index has risen 16% YTD.
Some of the components of the Nifty Bank index, such as Bank of Baroda, Federal Bank, ICICI Bank and State Bank of India (SBI) have jumped 54%, 32%, 19% and 15%, respectively, this year so far.
The Q1FY23 numbers of the banking sector were better than expected on many parameters. As the brokerage firm Motilal Oswal Financial Services pointed out, the banking sector has reported strong Q1FY23 earnings propelled by a healthy recovery in loan growth and controlled provisions.
"Loan growth was led by healthy traction in retail and SME segments along with a sharp revival in corporate (led by PSU banks). Deposit growth however was tepid, with CASA ratios witnessing divergent trends – large private and PSU banks experiencing a moderation in CASA mix while small and mid-size banks reporting a further increase," said Motilal Oswal.
The road ahead
At this moment, most analysts are positive about the banking sector.
Tanusree Banerjee, Co-Head of Research, Equitymaster underscored most of the banking stocks have seen healthy gains over the past few months on the back of expected firmness in lending margins.
Banerjee added that the margin expansion could continue until deposit rates catch up, which is a matter of a few quarters. Stocks of banks with good asset quality may continue to find favour until then.
The earnings, too, of the financial sector may remain strong for the current quarter also. Motilal Oswal expects earnings to remain resilient, guided by robust traction in loan growth, improving margin trajectory aided by rate hikes and improving asset quality.
However, high inflation and consequent aggressive rate hikes can impact the pace of demand recovery adversely.
Motilal pointed out that banks with a higher CASA mix and a healthy mix of floating loans are well positioned to navigate through the rising rate environment.
"We believe that large banks with strong liability franchises are well placed to gain incremental market share. Banks reported healthy trends in fee income (Q1FY22 was hurt by Covid 2.0); however, muted treasury performance kept PPoP growth under pressure," said Motilal Oswal.
The brokerage firm has raised its earnings estimates by an average of 2% for FY23/24. It retains its preference for ICICI Bank, SBI, HDFC Bank and IndusInd Bank. Within midcaps, it prefers Federal Bank.
Ajit Kabi, Banking Analyst at LKP Securities is of the view that the fundamentals are improving rapidly as growth comes back and stable asset quality.
Kabi highlighted that restructuring books across banks have eased down to a satisfactory level. Public banks like SBI, Bank of Baroda and Canara Bank are participating well in the credit growth environment.
However, margins are declining because of interest rates hike. The treasury losses are one-off and temporary, which are anticipated earlier.
Kabi believes the banking sector is witnessing a growth cycle and the asset quality cycle is behind. Thus there is still potential for price upward movement. His top picks are ICICI Bank, SBI, Bank of Baroda, and Canara Bank.
The technicals about Nifty Bank
Vikram Kasat, Head Advisory, Prabhudas Lilladher said Nifty Bank is witnessing strong momentum with some leading constituents of the index having a strong bullish setup.
"The undertone continues to remain positive for the banking space. An immediate hurdle may be felt near the 39,500 on the upside. As long as 38,200 is held, momentum is likely to continue with a positive bias," Kasat said.
"We like Axis Bank which has upside potential towards the ₹810-820 zone which is a decent 8% upside. Federal Bank too has a strong setup and is poised for a 12-15% upside. HDFC Bank has closed with two back-to-back Doji and is poised for a bigger move," said Kasat.
Santosh Meena, Head of Research, Swastika Investmart said Bank Nifty is consolidating near 39,500 where we can expect some profit booking towards 38,700-38,400 while if it sustains above 39,500, then we can expect a move towards 40,000.
Rahul Goud, Research Analyst- Equity Research, CapitalVia Global Research pointed out that on the daily chart, Bank Nifty showed a breaking of a falling trend line, indicating an increase in optimism. Nifty Bank has gained 11% so far this year, and indicators point to further gains in the days ahead. Although the momentum oscillator RSI is overbought, there isn't a bearish crossover in the indicator. As long as the trend is above the falling trendline, it is expected to continue in a positive direction.
"If the Bank Nifty dips below 38,500, we can start a long trade with a stop loss at 37,900 and an ultimate objective of 41,000. Collapsing inflation is bolstering the bulls on the upside, and if it continues to decline in the near future, we could see more pyrotechnics on the upside for the Bank Nifty. ICICI Bank and HDFC Bank are our favourite picks in the sector and add these stocks on dips," said Goud.
Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.