Why investors are chasing banking stocks? Bank Nifty edging closer to record highs

Indian markets overcame an early plunge to turn flat in noon trade, led by strong gains in banking stocks. The Bank Nifty index was up 1.2% to 41,370, less than 500 points away from record highs. ICICI Bank and SBI shares hit record highs today. The broader market benchmark Nifty was down 0.25% and traded near 18,000 levels. The Nifty had plunged to 17,771 in early trade, tracking a global selloff after Tuesday's hot US inflation report.

On banking stocks, Punit Patni, Equity Research Analyst, Swastika Investmart Ltd, said: “Banking stocks have witnessed a significant rise in investors’ interest due to improvement in fundamentals, buoyant growth outlook, robust balance sheets, and sanguine asset quality expectations. We believe that the Indian economy will witness an upcycle in the coming years which will lead to a significant credit uptake. Additionally, FII and FPI buying has been a cherry on the cake. Our top picks for the sector are ICICI Bank, HDFC Bank, SBI, and Federal Bank.”

Another factor that is helping banking stocks is strong buying by FIIs.

"Domestic-economy facing stocks like high quality financials, capital goods, autos, segments of FMCG and telecom are relatively safe now. Global economy-facing stocks like IT and metals are likely to be under pressure," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

“The most important bullish factor that has caused and is sustaining India's market outperformance is the strong growth recovery underway in India now. RBI's report which puts bank credit growth now running at 15.5% is an endorsement of this fact. Bank Nifty which has outperformed Nifty is a reflection of this strong undercurrent in the banking segment,” he added.

Hitesh Jain, Lead Analyst - Institutional Equities, YES SECURITIES, said: “FIIs are now pouring money in domestic facing sectors like banks and consumption stocks which are immune to global shocks and traction is apparent in terms of India’s credit growth and consumer spending.”

In terms of valuations, BNP Paribas in a report said: “We remain selective with OVERWEIGHT (OW) on the banking sector, given that it is trading below its 10-year mean NTM (next 12 months) PE, with improving credit growth and stronger and cleaner balance sheets.”

Axis Bank, HDFC Bank remain some of the top picks of BNP Paribas from this sector.