Rally in banking stocks continues as credit growth picks up & margins get a boost

• Indian banking stocks have outperformed the benchmark Nifty50 in the last one month.
• Among banking stocks, public sector banks have seen huge interest as Nifty PSU Bank went up by 16.48% in the last one month.
• Analysts say banking stocks have witnessed several re-rating recently due to improvement in growth outlook.

Indian banking stocks have been rallying since the last couple of weeks on the back of an uptick in lending, improved asset quality and rising deposits amid a higher interest rates scenario.

In fact, the Nifty Bank index has outperformed the benchmark Nifty50 in the last one month. The Nifty Bank index rose 8.69% in the last one month, while the Nifty50 went up by 2.39% in the same period.

Among the banking stocks, public sector banks have seen huge interest as the Nifty PSU Bank index is up 16.48% in the last one month.

Last week, PSU major SBI’s market capitalisation hit ₹5 lakh crore, making it the seventh largest company. Its stock price is hovering around its record high of ₹578.65, hitting ₹578 in Tuesday’s trade.

Analysts say banking stocks have witnessed a re-rating recently due to improvement in growth outlook.

“Banking stocks have been going up for a couple of reasons – one is the credit growth has now started picking up nicely; the net interest margins (NIMs) are improving; and asset quality, so far, has been stable as there is no deterioration. All three put together have led to re-rating of banking stocks,” Deepak Jasani, head of retail research at HDFC Securities, told Business Insider India.

Bank deposits set to improve
Analysts believe that rising deposit rates may have driven investors to banking stocks.

Overall deposits in the banking system have grown at 10% CAGR over the last three years as of June 22, with private banks growing faster at 13% CAGR vis-à-vis 8% for PSU banks, said a report by Axis Capital.

What’s underpinning hopes of further growth in bank deposits is the fact that central banks across the world have been raising interest rates to battle inflation and expectations are building up for further rate hikes.

“Previous cycles indicate a positive correlation between deposit growth and interest rates – deposit growth improves with rising rates and vice versa, though with a lag. Share of deposits in household financial savings is expected to rise as higher deposit rates make them attractive vis-à-vis other market-linked savings instruments,” said a report by Axis Capital on September 19.

However, in the long term, banks could face mark-to-market (MTM) losses, analysts said.

“In the initial part of the interest rate rise, banks tend to do well because their lending rates grow faster than their deposit rates, so their margins expand. If this continues, then beyond a point this benefit is nullified by MTM losses on their investment book - Held for trading (HFT) and available for sale (AFS),” said Jasani.

PSU banks losing out to private banks in race for deposits
While the overall deposits in the banking system has been growing, this has been at the cost of PSU banks. PSU banks have been losing deposits’ market share to private sector banks steadily since FY15 .

As of Q4 FY22, the share of PSU banks in overall deposits has come down to 60% from 74% in FY14.

“We believe that private banks and small finance banks (SFBs) have gained on the back of a steady branch expansion strategy to enter newer geographies whereas PSU banks have seen contraction in branch network post consolidation. This, along with superior digital offerings, focused customer acquisition strategy and higher rates offered by mid and small banks is leading to a shift in the market share,” said the report by Axis Capital.

In spite of the changing market shares, analysts say most banks are uniquely positioned to gain from the current cycle — where companies are borrowing more while the general public is depositing more.

$AXISBANK.NSE When the whole banking sector is in momentum one of the leading bank stock is near crucial resistance zone of 817.40If this is taken out and stock sustains 820 zone then stock can approach near ATH keeping this on watchlist however keep one thing on mind the banking stocks have given a good rally and $NIFTYBANK.NSE itself is near resistance and is trying hard if the sector supports then a good move can be seen in $AXISBANK.NSE Also trade with strict SL near swing low of 785-780 and follow proper risk management

— (@Invest4futures) September 20, 2022

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