scorecardresearchWhat's ahead for Nifty Bank? Here's what market experts say and their top
Despite hitting a fresh high last week, the index is just up 2 percent in November so far, extending gains from a 7 percent rise in October.

What's ahead for Nifty Bank? Here's what market experts say and their top picks

Updated: 15 Nov 2022, 01:54 PM IST

Despite hitting a fresh high last week, the index is just up 2 percent in November so far, extending gains from a 7 percent rise in October.

Nifty Bank on Friday hit a fresh high of 42,345.50 on the back of the resumption of credit growth, stable or improving asset quality and stable/growing NIMs. Strong September quarter results by the majority of lenders also lifted investor sentiment toward the space.

"In 2022, Bank Nifty performed exceptionally well. It is among the highest-performing industries in 2022. One of the reasons for that is that nonperforming loan ratios have begun to decline, which has pleased investors. The second reason is that loan growth in the banking sector has been quite robust. These had been performing poorly since Covid-19 struck from March 2020 to December 2021," explained Mohit Batra, Founder & CEO, MarketsMojo.

Despite hitting a fresh high last week, the index is just up 2 percent in November so far, extending gains from a 7 percent rise in October.

The banking index has massively outperformed the benchmark in 2022 YTD as well as in the last 1 year.

In 2022 so far, Nifty Bank has surged 18.5 percent versus a nearly 6 percent jump in Nifty, whereas, in the last 1 year, Nifty Bank is up 8.5 percent as against a 1.5 percent rise in Nifty.

Nifty Bank
Nifty Bank

The reason

According to Vinit Bolinjkar, Head of Research, Ventura Securities, the key reasons are high system loan growth which has grown 15 percent YoY in Q1FY23 with loan growth outpacing deposit growth for most of the banks. The loan growth is mostly led by retail and SME segments, he noted.

"NIMs are also set to expand as in a rising yield environment, lending rate normally outpaces deposit rate. Credit costs reported by private banks in Q1FY23 stood at 50-70 bps much below their normalized levels," further explained the expert.

Meanwhile, Ajit Kabi, Banking Analyst at LKP Securities said that the growth across sectors and asset quality improvement are the key reason. Nevertheless, the deposit growth and margin stability will be key-monitorable in coming periods, he added.

"The rally in the banking index is driven by waning asset quality challenges along with fresh stress formation visibility being lower, improving profitability, and margin expansion," noted Dnyanada Vaidya, Research Analyst, at Axis Securities.

Outlook and Strategy

"Bank Nifty needs to close above 41840 for a few more sessions before we can treat it as a valid long-term breakout. If and when it manages to do that, it may then continue to hit new highs before any major correction," Deepak Jasani, Head of Retail Research, HDFC Securities noted.

Meanwhile, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services believes that Bank Nifty at record highs can provide resilience to the market as the prospects of banks continue to improve.

Bolinjkar also expects banking stocks to outperform the market as credit growth is expected to stay robust. Also, the asset quality issues have been resolved for most of the banks and are within the controllable range. He does not see major concern or any major correction as of now.

"Q2 has been all-around strong performing for most banks. Credit growth has remained buoyant, and management commentary around growth is encouraging. Banks with a higher share of floating-rate loans have seen the benefits of faster repricing on their margins. Asset quality and restructured book trends, too, have been healthy and are expected to continue, translating into lower credit costs, resultantly driving earnings growth for banks," said Vaidya of Axis.

He expects a similarly strong performance delivery by banks in the coming quarters supported by sustained credit growth momentum, strong capital adequacy, and lower asset quality stress. Currently, the challenge for banks is the widening gap between credit-deposit growth, he added.

Top Picks

Vaidya of Axis likes ICICI Bank and SBI among the top banks. He is also bullish on Federal Bank and AU Small Finance Bank.

"In terms of our top pick, we believe that investors can choose between HDFC Bank (2.3x FY24 P/BV) and ICICI Bank. (2.9x FY24 P/BV). While ICICI Bank may continue its outperformance over HDFC Bank in the short term, we believe that the trend and in turn the valuation gap should reverse once the merger is completed leading to synergy benefits playing out for HDFC Bank in distribution," said Bolinjkar.

Meanwhile, Jasani of HDFC Sec's top picks among banks includes Axis Bank, ICICI Bank, Kotak Bank and SBI.

Contrarian View

Batra of MarketsMojo believes the banking industry will underperform, and hence would not bet on this space. "Our good buys are from public sector banks, not private sector banks. Bank of India, Union Bank of India, and Bank of Maharashtra will perform well," he said.

Batra noted that the public sector has produced some of the best-performing banks, not the private sector. This is a significant relief for the investors of public sector banks, as public sector banks have underperformed significantly over the past few years.

"However, according to our sector assessment, the credit deposit ratio has increased slightly. As a result, banks will be forced to raise deposit rates. This could result in the Net Interest Margin (NIM) being under pressure," he explained.

Further, Batra pointed out that historically, two phenomena have been observed when the interest rate has increased. First, the growth rate of advances decreases. Second, NPA levels increase. These two are possible, which means that all positive outcomes are priced in the Bank Nifty at this time. From this vantage point, it appears improbable that Bank Nifty will outperform, stated Batra.

Technical View

Kunal Shah, Senior Technical Analyst at LKP Securities said, "the Nifty Bank bulls managed to surpass the hurdle of 42,000 with major participation from HDFC bank. The index to move forward will require participation from the other counters to go higher towards the levels of 43,000-43,500. The lower-end immediate support stands at the 41,700-41,500 zone which should act as a cushion."

Market Outlook

Anmol Das, Head of Research at Teji Mandi said, “With the benchmark indices touching 52-week highs and the Nifty Bank Index touching new all-time highs, we remain cautiously optimistic advising investors to be agile and aware of the recent and upcoming macroeconomic events in order to make dynamic decision-making both ways."

In the event of a sustainable rally and not to miss out on such opportunities, he advises investors to stay invested within the same portfolio while making stock-specific decisions as per Q2 earnings.

However, at these levels, he noted, "we are equally aware of the downside of new stock entries as the earnings season is coming to an end, and there may be some profit booking in many sectors that have rallied significantly over the past couple of months. However, with a delinked view from the global economic scenario, the domestic economy has performed much better than expected in the 2nd quarter results, which will help the very fundamental valuations of Indian equities look more attractive than their global peers.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

This is what banks can do to the stressed loans. 
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First Published: 15 Nov 2022, 01:54 PM IST