Banking stocks have been among the worst hits in the recent selloff in the Indian stock market. However, several experts view the pressure as temporary as they find many banking stocks attractive investment prospects for the medium to long term.
The Nifty Bank index is down over 3 per cent in May so far against a 2 per cent fall in the equity benchmark Nifty 50. Nifty PSU Bank index is down 6 per cent this month so far, while the Nifty Private Bank index has declined 3 per cent.
Shares of Punjab National Bank have suffered a strong loss of 12 per cent this month despite the bank reporting a nearly 160 per cent year-on-year jump in Q4FY24 net profit to ₹3,010.27 crore.
Also Read: PNB Q4 results 2024: Net profit jumps 160% YoY. Key highlights you should know
Shares of HDFC Bank, Bank of Baroda, IndusInd Bank and IDFC First Bank have fallen 5-6 per cent in May.
Experts remain positive
Most experts are positive about banking stocks as they see no major concern in their fundamentals. The biggest reason behind the selloff in banking stocks appears to be the RBI’s proposal to tighten project financing norms.
"The recent pressure on banking sector stocks can be attributed to the RBI’s proposal to tighten project financing norms by setting standard asset provisioning of up to 5 per cent on loans. However, we believe that the recent reaction is more sentimental in nature and the overall outlook for the sector remains positive," said Shreyansh V. Shah, a research analyst at StoxBox.
On May 3, the RBI issued a draft prudential framework for banks undertaking project finance. The framework proposed increasing standard asset provisioning to 1-5 per cent of loans from the current 0.4 per cent in a phased manner on project loans that are not overdue to stressed.
Also Read: Mint Primer | Infra financing guidelines: Why are banks upset?
Weak market sentiment due to Lok Sabha election-related jitters is another factor keeping banking stocks under pressure recently.
The Q4 numbers of several major banks were largely in line with estimates. Experts expect banking stocks to come back to focus after the election outcome.
"Banking stocks have reported in-line results, with lower provisioning and healthy credit growth aiding profitability. Regulatory diktats from time to time and over-ownership among institutional players may hinder further major rerating of banking stocks in general, although there may be a few exceptions. However, we may see interest in these stocks again (especially in PSU banks) after the election outcome on the expectation of reforms and divestment," said Deepak Jasani, the head of retail research at HDFC Securities.
"The Q4 results of the banking sector were also mostly in line with market expectations. The NIMs showed mostly flattish trend to marginal deterioration, while asset quality remained stable. While loan growth remained robust, the highlight for this quarter was a pickup in deposits sequentially on the back of resourceful deposit mobilisation," said Shah of StoxBox.
Also Read: Canara Bank vs Union Bank: Which low PE PSU stock to buy today? Explained
What to buy?
Shah's top picks from the banking sector include SBI, IndusInd Bank and J&K Bank.
Anand Dama, the head of BFSI research at Emkay Global, is positive about the banking sector due to a healthy margin and treasury outlook and improved headline asset quality. He is more positive about public sector banks, including Indian Bank, SBI, and Bank of Baroda. Amongst private banks, he is selectively positive about ICICI Bank, Axis Bank, and Karur Vysya Bank.
Vijay Singh Gour, a senior analyst at Choice Broking, said SBI, IndusInd Bank, ICICI Bank, and Axis Bank are his preferred picks.
Gour said they performed well in Q4FY24 and are likely to sustain this performance in FY25 and FY26.
"IndusInd Bank is a better choice among private banks as its performance was very strong in Q4FY24. The bank's loan growth is expected to be sustained for FY25 and FY26. Contributions for higher yield products are likely to go up, which would keep margins on a bit higher side. Asset quality is expected to improve over the next two years, and the return ratio is expected to be healthy," said Gour.
"Among the public sector banks, SBI reported a robust performance in Q4FY24 and FY24. The bank's loan growth is expected to be healthy between 13-15 per cent in FY25 and FY26, whereas net profit is expected to grow at a 14 per cent CAGR over the FY25-26 period. The NIM (net interest margin) is expected to stabilise at the current level, and the RoA (return on assets) will stay above 1 per cent for FY25 and FY26. Due to digitalisation, SBI is expected to take advantage of economic expansion and leverage operating costs," Gour said.
However, Amit Goel, the co-founder and chief global strategist at Pace 360, is slightly cautious about banking stocks in the short term due to their stretched valuations.
"Valuations are overstretched just as an imminent global recession threatens corporate earnings. Even considering the growth trajectory of many stocks, the current valuations don't justify them. Hence, we will continue to be underweight in these stocks," said Goel.
"Due to stretched valuations, investors should remain cautious and hold off on making investments until a sizable market correction occurs. After a sizable correction, we prefer Canara Bank, SBI, and Axis Bank stocks," said Goel.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
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First Published:
15 May 2024, 05:52 PM IST
