Some of the top banking stocks, especially the private ones, have been under strong pressure in the last one year, making their key index Nifty Bank underperform the benchmark Nifty50.
Exchange data show Nifty50 has given a return of 8 percent in the last one year (since March 2021) whereas Nifty Bank has fallen 4 percent in the same period. Some private banks are the worst hit while PSU banks have done much better. Nifty Private Bank index is down almost 9 percent in the last one year while Nifty PSU Bank index is up 7 percent.
Data from brokerages show that shares of some of the Nifty Bank components, such as RBI Bank, have plunged as much as 48 percent in the last one year. Shares of IDFC First Bank are down 39 percent, while those of Bandhan Bank and Punjab National Bank are down about 20 percent each.
Only three members of the Nifty Bank index - State Bank of India (15 percent), ICICI Bank (10 percent) and Federal Bank (7 percent) - are in the green in the last one year.
Why did bank stocks fall?
Some of the bank stocks suffered because of concerns about their asset quality. In the wake of Covid-19, analysts started to point out that banks were finding it difficult to increase their lending and market share. However, easy liquidity from the RBI helped banks and not all banks suffered losses.
Since the Covid-19 epidemic broke out, the Indian banking and finance sector has been taking carefully calibrated steps to stabilise key sectors and support them in their growth efforts.
Also, there has been a lot of structural changes in the last 3-5 years which has significantly dented the prospects of the banking sectors.
"The credit growth of banks has been shrinking in the last few years. Plus, the entry of new players has dented the strength of established players. The entry of fintech companies has also clouded the growth outlook of banking sectors and last but not the least, growing might of NBFCs are a fresh worry for banking players," G Chokkalingam, Founder, Equinomics Research & Advisory, observed.
The road ahead
The banking sector has structural challenges but the emerging trends appear to be favourable for the sector.
Harsh Patidar, Senior Research Analyst at CapitalVia Global Research underscored that the Indian financial sector has evolved over time to include a variety of actors, ranging from commercial banks to non-banking financial corporations (NBFCs) and fintech firms. With the focus of government on liquidity and growth, banks would play an important role in catering to the different segments of the economy.
"SBI, HDFC Bank and Kotak Mahindra Banks are fundamentally very strong and can provide good returns in the future," said Patidar.
The lending of the banks is also improving as the RBI’s latest report showed the Weighted Average Lending Rates (WALR) on fresh loans has improved 10bp month-on-month (MoM) in January 2022 with private banks seeing an increase of 12bp MoM against 7bp MoM increase for PSU banks.
"Private banks continue to display better spread management with the difference between outstanding loan yield and WATDR holding stable while the same moderated further for PSU banks. Though on fresh loans, both PSU and private banks reported 7bp/12bp MoM increase in loan yields, respectively," brokerage firm Motilal Oswal Financial Services pointed out.
"With the ongoing tightness in rate environment along with potential policy rate hikes by the RBI, we expect banks to gradually see an increase in their lending yields. On the other hand, higher CASA mix and calibrated increase in deposit rates – given ample liquidity – will help limit the increase in portfolio deposit costs," Motilal Oswal said.
Banks with a higher mix of floating rate books stand to benefit from the turn in rate cycle. Motilal Oswal continues to prefer ICICI Bank, Axis Bank and SBI.