Banking stocks lift Sensex, Nifty to record highs; SBI, BoB & India Bank top buys

Bulls remained in control of D-Street on Friday as well pushing both Sensex, and Nifty50 to fresh record highs helped by smart buying seen in the banking and financial services stocks.

Banking stocks were in focus after the Union Cabinet cleared a proposal to provide Rs 30,600 crore government guarantee for security receipts issued by the National Asset Reconstruction Company (NARCL) as part of the resolution of bad loans.

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Financial services hold maximum weight in the Nifty50 index as per August 31, 2021 calculations. The NIFTY50 index is a well-diversified 50 companies index reflecting overall market conditions. NIFTY 50 Index is computed using the free-float market capitalization method.

The Nifty50 hit a record of 17,778 in morning trade while the S&P BSE Sensex hit a record of 59,663.

Experts are of the view that the announcement could well turn fortunes for the banking sector, and smart money could start moving towards banking stocks from IT. Some of the top picks include SBI, Bank of Baroda, and Indian Bank from the public sector banking space.

“In 2021, till date, the Nifty IT has been outperforming the Nifty while Bank Nifty has been underperforming. There is a possibility of change in leadership of the market away from IT, perhaps to Banks,” Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

“The announcement of the 'bad bank' road map and govt guarantees for security receipts to be issued by the NARCL will improve the prospects of banks, going forward,” he said.

The proposed bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts. The government guarantee would be invoked if there is loss against the threshold value.

Briefing reporters on the decision, she said banks have recovered Rs 5.01 lakh crore of unpaid loans in the last six years. Of this, Rs 3.1 lakh crore has been recovered since March 2018.

The long-awaited bad bank, National Asset Reconstruction Company Ltd. (NARCL), could soon be operationalized as the government removed one more hurdle. The move will address banks/RBI concerns about incremental provisioning, suggest experts.

“Among PSBs, SBI, BOI, Union, and PNB will benefit the most in terms of reduction in GNPAs due to the transfer of NPAs to NARCL. From a long-term perspective, PSBs, in general, will benefit as the removal of legacy stress will free up management's bandwidth to focus more on growth, improve prospects for raising capital with a relatively cleaner B/S, and facilitate the privatization of a few banks as envisaged by the government,” Emkay Global said in a report.

“However, the balance sheet clean-up and privatization will have to be augmented with radical institutional and governance reforms at PSBs to ensure they thrive amid rising competitive intensity. Among PSBs, SBI, BOB and Indian Bank are our preferred picks,” it said.

(Disclaimer: The views/suggestions/advices expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)