Banking stocks are rallying to the rise in rates; Experts are bullish on the uptrend

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Helped by rising interest rates, an expanding retail loan portfolio and improving credit quality, many bank stocks have outperformed broader equity indices this year and experts are hoping the recovery will hold. will continue as long as there are no major macroeconomic headwinds.

While the BSE Bank index is up 5% since the start of 2022, compared to a fall of nearly 4% in the benchmark BSE Sensex index, some key banking stocks like Bank of Baroda have risen 30-40% in the same period, according to stock market data.

Analysts said the banking space is known as a “mother sector” because better performance of banks indicates better days for the economy, but the banking sector is hit hard when the economy is doing poorly.

With the NPA (non-performing assets) scenario having improved and few cases of major bad loans emerging after a large-scale deleveraging exercise led by corporate borrowers, there is little indication that things can go wrong for the sector as seen in the quarterly results of most banks, according to experts.

Ajit Kabi, a banking analyst at LKP Securities, said some banks performed very well given the scenario of higher interest rates.

“ICICI Bank, Bank of Baroda and SBI performed as expected. However, HDFC Bank underperformed due to merger and margin issues,” he said.

Bank of Baroda is up almost 42% in 2022 so far, Federal Bank is up 29% and Karur Vysya Bank is up 18%.

“Banks have done reasonably well in 2022. But we also have to understand that there has been a divergence within the banking industry. While on the one hand banks such as Federal Bank have been performing exceptionally , others, such as RBL Bank, have struggled to obtain so have IDFC First Bank and India’s most valuable bank, HDFC Bank,” said Sunil Damania, Chief Investment Officer at MarketsMojo. , an equity research and advisory platform.

He said that these three banks (RBL Bank, IDFC First Bank and HDFC Bank) are below the level they were quoting at the end of 2021.

“So while the Nifty Bank Index has done reasonably well and outperformed the broader indices, not all banks participated, including HDFC Bank. And so, while some investors are happy, to others were disappointed based on the stocks they invested in,” Damania added.

HDFC Bank is down almost 6% year-to-date, while RBL Bank has fallen 28% and IDFC First Bank has plunged 26% on BSE.

Among the winners, Canara Bank jumped 15%, Bandhan Bank around 13% and State Bank of India 12%, while ICICI Bank, Axis Bank and Yes Bank rose 7-8%.

IndusInd Bank rose more than 6%, while Kotak Mahindra Bank rose around 2%.

“The banking sector is usually said to be the parent sector to give a signal of economic growth and it is clearly seen that the Nifty Bank index has outperformed the Nifty-50 index by 300 basis points on a monthly basis. If we dig Moreover, it is interesting to note that the portfolio of personal loans (housing loans) is growing faster than industrial loans, which is the main driver of bank lending in recent quarters,” said Prashanth Tapse, vice- President (Research) at Mehta Equities Ltd.

In a scenario of rising interest rates, banks tend to profit because the net interest margin naturally increases, their costs remaining stable in the short term. This has helped banks outperform and deliver handsome returns to investors so far, he added.

MarketsMojo’s Damania said both the public and private sectors saw some banks doing well and others not earning as much, but PSU banks appear to have done better at a sub-index level.

“The Nifty PSU Banking Index in 2022 is up 10.18% versus a 3.5% rise in the Nifty Banking Index,” he said.

Cyril Charly, research analyst at Geojit Financial Services, said that while banks posted strong numbers and an upbeat outlook, the performance of bank stocks was hurt by a sell-off from foreign portfolio investors (REITs).

However, the recent reversal in the REIT trend and attractive valuations have helped banking stocks outperform other sectors, Charly added.

The performance of banking stocks has been particularly strong in recent weeks, with the BSE Bankex index up nearly 13% since mid-June.

Charly said the sector is poised for a strong performance in the second half of 2022, with an increased focus on growth due to the strong recovery in loan growth, improving asset quality , a healthy provision coverage ratio and strong capital adequacy.

“However, due to their substantial exposure to foreign investment, REITs will also play an important role in setting the trend. The recent reversal in the net buying trend of FIIs is a positive development for the sector,” said added Charlie.

Tapse also said the banking index is heading for further outperformance as banks’ net interest margins are in expansion mode due to a higher interest rate scenario.

In addition, NPAs are now at a 10-year low and credit growth is consolidating in the hands of big banks, he added.

Krishnan ASV, Senior Vice President, Institutional Research, HDFC Securities, said, “We remain constructive on the banking sector, with a preference for strong, well-capitalized depository franchises.

MarketsMojo’s Damania, however, said that despite the strong performance of stocks or the banking index, banks as an index could underperform in the second half of 2022 for a very simple reason when the economy is slowing down, it has impact on credit growth.

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