ICICI Bank, BoB: Favourable valuation, increased FII inflow to drive banking sector outperformance ahead

Stock market news: Since fundamentals at banks remain strong and valuations offer much-needed comfort, analysts and brokerages foresee the sector performing well going ahead. As such, HDFC Securities, a leading domestic brokerage, bets on large-cap banks.

The brokerage is positive on the BFSI (banking, financial services, and insurance) space and is of the view that repo rates expected to be cut in H2CY24 will provide a boost to credit growth in rate-sensitive sectors such as affordable housing and automobiles, among others.

Asset quality for large banks is expected to remain healthy, led by superior underwriting quality and prudent provision reserves, according to the brokerage.

Further, the RBI’s latest norm about the higher risk weight assigned to unsecured loans will dilute capital adequacy, and private sector banks that have the highest share of such outstanding loans will face a major blow. LKP Securities’ Research Analyst Ajit Kabi sees them as having sufficient capital to handle the impact.

Additionally, Kabi, after a strong credit offtake and systemic deposits growth on expected lines in CY23, sees loan growth to remain strong going ahead in CY24 given the election year, consumer demand, and higher capital outlay.

Further, Omkar Kamtekar, in his note to Zee Business, says that he is bullish on the space and sees the sector outperform over the next 12-month period given the Fed rate cut, which is anticipated as early as March 2024. The expert believes the move will initially trigger FII money into the financial services sector.

“Within this sector, we have a bullish outlook on the larger-cap banks that are available at significant discounts and select PSU banks that have sound asset quality,” Kamtekar added.

Nevertheless, Kabi held that, given the robust return ratios reported in the previous three years, the private banking names are trading at a decade-low valuation. Hence, the low valuation may drive the stock price performance, the analyst added.

A recap of the banking sector in 2023

On the whole, the US Fed’s interest rate decision played a pivotal role in influencing global equity markets, and volatility was triggered due to it, especially in banking names.

The PSU bank stocks have been the star performers during the year. The Nifty PSU Bank index has jumped an impressive 31.79 per cent as of Wednesday's (December 27) close (YTD). Kamtekar notes that the stocks have rallied primarily on the back of gross under-ownership coupled with the continuously improving financial position.

On the other hand, their private counterparts, essentially the large-cap banks, were the laggards during the year.

Technicals also suggest bullish move is intact

Avdhut Bagkar, derivatives and technical analyst at StoxBox on the Nifty Bank outlook, maintained that the stability over the 46,000 level has sparked a new breakout in the banking index, visualising a move towards the 52,000 level in 2024. "The underlying trend has remained highly bullish, and technically, we shall see more positive bias ahead," Bagkar added.

Hereon, any weakness could be viewed as buying opportunities, as the “Higher High, Higher Low” continues to dominate bears on the street, the analyst added. Further, Bagkar noted that the current formation of a ‘Golden Cross’ implies a robust move over 48,000 could spark a sharp upward move.

Only a decisive breakout beneath 42,500 could dampen the optimistic bias; otherwise, the long-term trend remains highly resilient towards the 60,000 mark, according to the weekly chart, the analyst pointed out. 

RBI report on banks, NBFCs during 2022-23 and 2023-24 paints an optimistic picture

The apex bank as part of its compliance released the Report on Trend and Progress of Banking in India 2022-23 wherein it said the balance sheet of SCBs expanded 12.2 per cent, driven by credit growth. Also, it noted that NIMs at the bank and profitability improved on the back of higher NII and lower provisioning.

Top picks from the banking pack

From the pack, analysts at LKP Securities recommend IndusInd Bank, ICICI Bank, Bank of Baroda, and Canara Bank.

Meanwhile, Kamtekar is bullish on Union Bank of India, IDFC First Bank, and HDFC Bank. HDFC Securities, on the other hand, is overweight on counters including Axis Bank and Federal Bank.