Nifty Bank outperforms benchmark in December: A look at outlook going ahead and top picks by analysts

The banking index hit a record high of 48,219.95 last week on December 15 on the back of overall positive market sentiment.

Pranati Deva
First Published19 Dec 2023, 02:43 PM IST
While the overall Indian market has been on a winning streak throughout the year, the banking index took seven months to outperform the benchmark.
While the overall Indian market has been on a winning streak throughout the year, the banking index took seven months to outperform the benchmark.(Pixabay)

For the first time since April, the Nifty Bank has outperformed benchmarks, surging nearly 8 percent in December so far, compared to a 6.5 percent rise in the Nifty. This marks a significant trend reversal for the banking index, which had last outperformed in April with a 6.5 percent advance against a 4 percent jump in the Nifty.

The banking index also hit a record high of 48,219.95 last week on December 15 on the back of overall positive market sentiment. It has surged 25 percent from its 52-week low of 38,613.15, hit on March 16, 2023.

The US Fed maintaining interest rate in the last policy meeting of 2023 as well as signaling rate cuts in 2024 led to a surge in the market. Moreover, the continuous foreign investor inflow, RBI holding rates, GDP growth coming better than expected in the September quarter as well as the improving global macros have also been aiding the sentiment.

While the overall Indian market has been on a winning streak throughout the year, the banking index took seven months to outperform the benchmark. Analysts suggest that the accumulation in fairly-priced segments like PSU banks and select private banks, along with short covering and reasonable valuations, is strengthening the banking segment.

Read here: Axis Bank vs Punjab National Bank: Which banking stock should you choose for long term?

Vinod Nair, Head of Research at Geojit Financial Services, commented, "This, along with short covering and reasonable valuations, will keep this segment strong."

The Nifty Bank has gained approximately 11 percent in the year-to-date period in 2023 and the last 12 months. In comparison, the benchmark Nifty has rallied 18 percent in the year-to-date period and 17 percent in the last 12 months.

Analysts emphasise the importance of the banking index's performance for the overall health of the Indian market. The continued support of banks is seen as crucial for sustaining record-high levels in the broader market.

Read here: Can Bank Nifty index climb to 50K in current Santa rally in stock market?

But will this support continue? Let's take a look at what analysts believe. They also list their top picks in the space for the upcoming year 2024.

Veer Trivedi, Research Analyst, SAMCO Securities

A significantly better credit demand, higher repo rates aiding the NIMs, & better asset quality environment keeping the credit costs under control have helped the bottom lines of all banks. Thus the banks with cheap valuations were the most benefitted which were mostly the PSU banks. Going forward now, with speed breakers like deposit pressure, peaking out of NIMs, and normalisation of assets quality environment, the re-rating cycle of cheap stocks seems to be over or near its end. Now the ones who will keep on performing with stability will be rewarded.

We thus prefer top private banks at this stage. We like HDFC Bank, Axis Bank, ICICI Bank & Federal bank.

Sonam Srivastava, Founder and Fund Manager at Wright Research, PMS

For the broader banking space, the outlook seems promising, spurred by rising income and government initiatives. 

Top picks include HDFC, ICICI, and Kotak Mahindra for private players, SBI for public sector giants, and IndusInd, and RBL for mid-sized players. This sector is dynamic, so continuous research and expert guidance are key before diving in.

Read here: Nifty Auto vs Nifty Realty: Which sector is a better investment bet for long term?

Shreyansh Shah, Research Analyst, StoxBox

Though most of the large and mid-tier banks have guided NIMs to be on similar lines as FY23 ranging around 3.5 percent, we believe that it would be difficult for banks to achieve that, especially after the results of H1FY24. However, the NIM compression would be partially offset by treasury gains, which improved the yield due to interest rate hikes and high demand seen in the fixed-income markets. Also, other income is seeing healthy traction due to cross-selling opportunities by banks and robust growth in retail loans and credit cards. All these factors cumulatively will help banks to deliver healthy net profit in 2024.

Our top picks are:

HDFC Bank: On the asset quality side, we feel all adjustments due to the one-off event of the merger and transition from IND-AS to I-GAAP have been taken care of in H1FY24. Going forward, due to the bank’s legacy of healthy credit profiling, we do not see any further deterioration in its asset quality and expect it to be stable. In the last five years, earnings have grown at 17% CAGR while market cap growth is only 9% which implies significant PE rerating potential. Thus, we expect the stock to achieve a target of Rs. 2,300 per share in the long term.

City Union Bank: Despite a slow start in H1FY24 compared to its peers, we are confident that the bank will achieve growth in mid-double digits in 2024. The bank currently trades at 1.2x FY25E book value and we value the stock at 1.4x FY25E book value to arrive at a target price of 179 per share.

Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities

In H1FY24, most banks delivered impressive credit growth, with unsecured loans delivering healthy growth. However, with the RBI increasing risk weights on personal and credit card outstanding, we expect growth in these segments to moderate. However, growth in the Retail and SME segment is expected to remain healthy, thereby driving buoyant credit growth. Margin contraction was visible in H1. We believe banks will continue to face headwinds on NIMs going into the year's second half, with CoF continuing its upward trajectory while lending yields remain stable. Asset quality does not appear to be a cause of major concern currently for banks and we expect credit costs to remain stable, thereby supporting RoAs. 

Our top picks from the banking space would be HDFC Bank, ICICI Bank, SBI, and Federal Bank.

Read here: InCred raises FY24 Nifty target to 23,191; lists 6 key reasons

Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital

We have an outperform rating on the banking space due to comfortable valuations, strong growth prospects, lower corporate and personal leverage, and strong profitability driven by low credit cost. We believe that near term margins of banks will remain under pressure due to aggressive competition in deposit acquisition, however, banks with superior customer base, healthy balance sheet and better profitability will outperform.

Our top picks in the banking space are HDFC Bank and SBI Bank.

HDFC Bank- We continue to believe that HDFC Bank is better placed on granular branch expansion and faster customer acquisition compared to most peers, which will ensure superior retail asset growth with healthy asset quality. HDFC Bank is currently available at lower valuations, HDFC Bank is our high-conviction ADD-rated stock with a target price of 2,000. We have valued the standalone bank at 2.7x FY25F BV.

SBI- We have added SBI to our high-conviction stocks list due to rising retail market share & well-managed asset quality. with +1 percent RoA and an improving asset quality trend, it is available at 0.8x FY25F BV which, we believe, is attractive. We have a TP of 750.

Ajit Kabi, Reasearch Analyst at LKP securities

⁠Our top picks in the banking sector would be IndusInd Bank, ICICI Bank, Axis Bank, Bank of Baroda and Punjab National Bank.


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 decision.

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First Published:19 Dec 2023, 02:43 PM IST
HomeMarketsStock MarketsNifty Bank outperforms benchmark in December: A look at outlook going ahead and top picks by analysts

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