Nifty bank indices surge on hopes of strong September quarter

The Nifty PSU Bank index and Private Bank index have risen nearly 5 percent each in the last five sessions ahead of the September quarter earnings figures that are due later this week. The Nifty Bank index advanced 4 percent in this period.

Both the Nifty PSU Bank and Private Bank indices have surged nearly 24 percent in the September quarter while Nifty Bank index gained 16 percent. In comparison, the benchmark Sensex and Nifty have risen over 8 percent in the quarter.

Investors continued buying banking stocks amid expectations of strong growth in the September quarter on the back of healthy margins and a drop in loan loss provisioning. Analysts said the sharp 190-basis-point increase in the policy rate since May and its transmission will lead to higher net interest income (NII). This will lead to improvement in the net interest margins (NIM).

Loan growth is also likely to be solid. All the banks reported a jump in loan disbursals in the June quarter. Analysts also expect treasury losses for the lenders to be minimal as bond yields were stable in July and August after rising in September. Overall bond yields have fallen 5 basis points (bps) in the September quarter, the first drop after four quarters. In the June quarter, bond yields surged 61 bps and by 31 bps in the March quarter.

“We expect banks under coverage to report 56% year on year (YoY) earnings growth, led by 26% YoY operating profit growth. We expect NII growth to bounce back at 17% YoY on the back of 15% YoY loan growth. As compared to the previous quarter, we should see NIM start improving as the loans linked to MCLR/EBLR have started to re-price to reflect the new policy rates. In addition, unlike the previous quarter, we don’t have any concerns about treasury losses as well this quarter as overall yields have been marginally lower than in 1QFY23”, Kotak Institutional Equities said in a recent note to investors.

Asset quality will also improve across lenders from a year ago, analysts expect. “Asset quality should see further improvement with strong near-term commentary on the direction of NPL (non-performing loan) ratios for FY2023. There is no large recovery in the corporate sector, but we are likely to see better recovery trends in small-ticket loans that defaulted post Covid,” the Kotak report added.

In the September quarter, among PSU banks, Bank of Baroda advanced 36 percent, Indian Bank 32 percent, Union Bank of India 30 percent, Canara Bank and Punjab National Bank 25 percent each, Central Bank of India 18 percent, and Bank of Maharashtra and State Bank of India rose 14 percent each.

Among private banks, Karur Vysya Bank rose 82 percent, IDFC Bank 58 percent, IndusInd Bank 49 percent, DCB Bank and RBL Bank 38 percent each, Federal Bank and City Union Bank 31 percent each, Yes Bank and ICICI Bank around 22 percent each, and Axis Bank and Kotak Mahindra Bank 12 percent each.

Hemali Dhame, associate vice-president, research, at Kotak Securities, said they remain positive on the banking sector. Gains in banking stocks in the last few sessions after the pre-quarter releases were impressive, showing healthy asset growth and leading the upside for the last few days, Dhame added.

“By and large, high economic activities mirroring the rise in GST (goods and services tax) collections and ongoing festival credit demand in Indian markets, I believe in the short term credit growth is likely to remain highly elevated and as a result banking stocks are expected to come out with a superior set of Q2 earnings which is getting discounted in the banking stocks in last few sessions. Overall, we remain optimistic on banks, both public as well as private banks, for the short to medium term and expect the sector to remain an outperformer,” said Prashanth Tapse research analysts at Mehta Equities.