Amid the rising volatility in the Indian equity markets following the sharp correction in the benchmark indices, brokerage firms and market experts continue to remain largely positive of the banking sector. They believe that easing interest rate cycle is likely to push the credit demand in the economy, despite a soft December quarter.
In the last one month, Nifty Bank has gained 1.3 per cent, compared to a 2.3 per cent fall in the Nifty50 index. However, both the indices have dropped nearly 7 per cent in the last three months. In the last one year, Nifty Bank has increased 4.2 per cent, while Nifty50 is up roughly 2 per cent during the same period.
Nuvama Institutional Equities noted that PAT growth of BSE500 companies remained subdued, barring the BFSI sector, posting a sharp slowdown on the back of input price tailwinds have faded while top line remains weak. Opex was lower than expected for all players and deposit growth was a constraint for most lenders. Margin decline was limited, said Nuvama.
The banking sector which has the highest weightage in the Nifty50 is also feeling the pinch of lows. Nifty Bank is trading near its 6-month lows price-to-book (P/B) ratio, highlighting its undervaluation and buying opportunity for investors, said Subhash Chand Aggarwal, Chairman & Managing Director at SMC Global Securities.
"The easing of the repo rate by 25 basis points will raise the credit demand and revive the credit growth of the banks. The bond purchases and VRR auctions by the RBI are the right steps to inject liquidity into the banking sector. The higher credit growth and RBI's proactive steps to manage liquidity will pave the way for a strong recovery of the banking stocks," he said.
A common reading from the brokerage reports emerged that NIMs of private banks stabilised while that of PSU banks weakened. This along with lower costs propped up PPoP growth for private banks. However, rising risks of credit costs persist. Nuvama continued to remain positive on private sector banks.
Loan growth of 15 banks under our coverage slowed down to 11.4 per cent YoY in 3QFY25 due to slowdown in unsecured loan segments. Deposit mobilization also remained under pressure with banks with private lenders outperforming the state-run lenders, said Nirmal Bang Institutional Equities.
"Private banks (including SFBs) under our coverage saw muted earnings growth of 2.5 per cent YoY and a decline of 3.2 per cent QoQ due to weak operating performance and a steady rise in credit cost. PSU banks on the other hand reported 64.3 per cent YoY increase in net profit due to lower credit costs and base effect in case of SBI which had frontloaded its pension and gratuity costs during the same period last year," it said.
NIMs continued to be under pressure and asset quality of some banks having higher exposure to unsecured retail and the microfinance segment deteriorated. Higher credit cost was on account of the unsecured segment, while lower share of unsecured loans helped PSU banks to counter the headwinds, Nirmal Bang's report said.
"We prefer larger banks with strong deposit franchise, good capital position and an ability to maintain asset quality across business cycles. In our pecking order of top picks, we recommend SBI, followed by HDFC Bank, ICICI Bank, Federal Bank and AU Small Finance Bank," it added with a 'buy' rating on these lenders.
Nirmal Bang has a 'buy' rating on lenders like Axis Bank, Kotak Mahindra Bank, City Union Bank and Bank of Baroda. However, it has suggested to 'hold' IndusInd Bank, DCB Bank, Punjab National Bank and Equitas Small Finance Bank. RBL Bank is the sole candidate with a 'sell' rating for the brokerage firm.