Banking stocks rally on rising rates, improving NPA scene; experts bullish on uptrend

Helped by rising interest rates, expanding retail loan book and improved credit quality, many banking stocks have outperformed broader market indices this year and experts are hopeful of a continuing rally as long as there are no major macroeconomic headwinds.

While the BSE Bank index has risen by 5 per cent since the beginning of 2022, as against a decline of nearly 4 per cent in the BSE benchmark Sensex, some key banking stocks like Bank of Baroda have rallied by 30-40 per cent in the same period, as per the stock exchange data.

Analysts said the banking space is known as a ‘mother sector’ as a better performance by banks indicates better days for the economy, but the banking sector is hit hard when the economy does badly.

With the NPA (non-performing assets) scenario having improved and not many cases of major bad loans emerging after a large-scale deleveraging exercise carried out by corporate borrowers, there are few indications that the things can go bad for the sector as is being seen in quarterly results of most banks, experts said.

Ajit Kabi, Banking Analyst at LKP Securities, said some banks have performed significantly well, factoring the rising interest rate scenario.

“ICICI Bank, Bank of Baroda and SBI have performed on expected lines. However, HDFC Bank has underperformed because of merger and margins woes,” he said.

Bank of Baroda has zoomed nearly 42 per cent in 2022 so far, Federal Bank by 29 per cent and Karur Vysya Bank has climbed 18 per cent.

“Banks have done reasonably well in 2022. But we also must understand that there has been a divergence within the banking sector. While, on one hand, banks such as Federal Bank were exceptional performers, others such as RBL Bank, have struggled to get investors’ attention. So was the case with IDFC First Bank and India’s most valuable bank — HDFC Bank,” said Sunil Damania, Chief Investment Officer, MarketsMojo, a stock advisory and research platform.

He said all these three banks (RBL Bank, IDFC First Bank and HDFC Bank) are below the level they were quoting at the end of 2021.

“So, while the Nifty Bank index has done reasonably well and outperformed the broader indices, not all banks have participated, including HDFC Bank. And hence, while some investors are happy, others have been disappointed depending on the stock they have invested in,” Damania added.

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