Banking stocks start FY24 in green, Bank Nifty up 200 pts. Will this sector sail smoothly this fiscal?

Banking stocks kickstarted the financial year FY24 on a positive note. On Monday, BSE Bankex and Bank Nifty indexes climbed by around half a percent. The majority of heavyweight bank stocks are in the green. The previous fiscal year FY23 was not a smooth period for banking systems especially the month of March which saw a panic over contagion fear and liquidity crunch. Despite robust credit growth, investors were cautious about adding banking stocks to their shopping list in FY23. Will a similar trend continue in the current fiscal as well?

BSE Bankex closed at 46,278.85 up by 246.90 points or 0.54%. Similarly, Bank Nifty jumped by 204.40 points or 0.5% to end at 40,813.05.

On Bank Nifty, Bandhan Bank was the top gainer soaring by nearly 5% followed by Punjab National Bank (PNB) and IndusInd Bank which surged by 1.6% and 1.1% respectively. IDFC First Bank also jumped by 1%.

Stocks like ICICI Bank, Axis Bank, Kotak Bank, and Federal Bank advanced between 0.5-0.8%. SBI, Bank of Baroda, and HDFC Bank were also marginally up.

AU Small Finance Bank, however, was the only laggard slumping by 2.4%.

On the latest performance, Rupak De, Senior Technical Analyst at LKP Securities said, the Bank Nifty has been outperforming the Nifty for the last few days; however, the week has started with a controlled positivity as the traders remained low ahead of the MPC meet. The trend will remain positive as long as the index sustains above 40000. On the higher end, immediate resistance is visible at 41000; above 41000 the index may move towards 42000 over the short term.

Will banking stocks sail smoothly in FY24?

According to Cyril Charly, Research Analyst at Geojit Financial Services, FY23 was not a year of smooth sailing for the banking sector. Though the year witnessed robust credit growth with improvements in asset quality, multiple headwinds kept the performance of bank stocks subdued. Central bankers worldwide were forced to battle heightened inflation, leading to a series of rate hikes. This, along with the global financial breakdown, kept banking sectors off the investor’s shopping lists.

However, Charly also added that while credit growth remained strong, banks struggled to balance the flow of deposits, resulting in tight liquidity in the system.

Geojit's analyst also further said, "although margins improved during FY23 with strong loan demand and improved book quality, further upward repricing of deposit rates due to growth imbalance could add pressure on margins."

"With expected moderation in credit growth during FY24 and pressure on margins, we maintain our neutral view on the sector, but with a stock-to-stock approach. A long-term investor can employ an accumulation strategy during the year as the sector is now trading at its long-term averages," in Charly's view.

In February 2023, RBI's data showed that on a year-on-year (y-o-y) basis, non-food bank credit registered a growth of 15.9% as compared with 9.2% a year ago.

Sectoral-wise performance, agriculture, and allied activities recorded credit growth of 14.9%, while industry registered a growth of 7%, and the services sector witnessed a robust growth of 20.7% in February on a year-on-year basis. Also, personal loan growth accelerated to 20.4% (y-o-y) in February 2023 from 12.5% a year ago, driven by housing loans.

ICICI Securities in its note said, "we believe India Inc, after undergoing a phase of deleveraging over the past few years, is now better positioned to embark on re-leveraging. Recovery in economic activity, the derivative effect of increased investments and spend on consumption may sustain >13% growth momentum over FY23E-FY25E."

Meanwhile, Kotak Institutional Equities in its report said, "we would want to believe that the risk to asset quality is quite limited at this point of the cycle. We do not seem to have any evidence of excessive lending toward a specific sector. We also do not see any asset build-up or signs of higher-than-normalized levels of leverage across sectors. This would imply that the slowdown in loan growth, if any, is probably unlikely to result in asset-quality stress."

Kotak's note added, "We have been arguing in the past that the increase in interest rates that we are witnessing currently has little to do with domestic credit growth and has been to address inflation and exchange-related issues. We factor in lower credit costs for FY2024-25E."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.