Bank stocks will continue to outperform in FY24; HDFC Bank, BoB, Bank of Maharashtra top picks: Analysts

Banking sector outlook: Bank stocks were in the limelight on Monday (May 29) as the majority of the scrips gained in the trade. The Nifty Bank index hit a fresh lifetime high of 44,483.35 during the day before settling at 44,311 points, up 0.67 per cent against Friday's close of 44,018. Its previous lifetime peak was 44,151.80, which was touched on December 14, 2022. Of 12 components, 10 ended in green and the rest two in red. AU Small Finance Bank (up over 2 per cent) was the top gainer on the index, followed by SBI, IndusInd Bank, and Bandhan Bank. 

In comparison, the benchmark S&P BSE Sensex settled at 62,846.38, up 345 points, or 0.55 per cent while the NSE's Nifty ended at 18,598.65, up 99 points, or 0.54 per cent.

Market analysts say that the banking sector will continue to outperform all other sectors in the fiscal 2023-24 and investors should pick quality names for long-term investment. AK Prabhakar, Head of Research at IDBI Capital Markets & Securities, said, "I am positive on select bank stocks. There are certain names whose valuations are very attractive. For example, HDFC Bank. The private sector lender has become very aggressive. In their commentary, they said it will open 1,500 branches each in the next two years. At the bourses, HDFC Bank has not done anything in the last 2-3 years... it has not shown any significant move. Bank Nifty may have hit a fresh high but this stock has not outperformed the index. Hence, there is enough steam in the stock," Prabhakar added.

Further, the market expert said he was positive on IndusInd Bank. Valuation-wise, it is very attractive, he said. He was also bullish on Federal Bank.

In the PSU bank space, the market expert finds Bank of Baroda and SBI attractive. Investors should buy these stocks at current levels. "Valuation-wise, Bank of Baroda is the most attractive stock. Pick any financial metric and Bank of Baroda will emerge as the most efficient PSU bank. It competes with private banks," the market expert added.

Among NBFCs, Shriram Transport and Sundaram Finance are very attractive, Prabhakar said.

G Chokkalingam, Founder and Managing Director, Equinomics Research, agrees. The analyst said he has been bullish on the banking sector for quite some time. "It has outperformed all other sectors at least for the last two quarters and I believe it will continue to outperform in the next 1-2 quarters," he said. The analyst gave three reasons behind this optimism. They are -

• Record credit growth: Chokkalingam said banking credit growth has hit a record high...it is growing at 15 per cent which is close to a 10-year high.  As per a report by Care Ratings, issued on May 23, 2023, "Credit offtake rose by 15.5 per cent year on year (y-o-y) for the fortnight ending May 5, 2023. In absolute terms, credit offtake expanded by Rs 18.6 lakh crore to Rs 138.6 lakh as of May 5, 2023. The growth has continued to be driven by personal loans, NBFCs, and higher working capital requirements. 
• Asset quality improves: The second reason is a significant decline in banks' bad loans. The net non-performing assets (NPAs) have come down drastically for most of the banks in the last 2-3 quarters. The quality of the assets is at a 10-year high, the expert notes. 
• End of the rate-hike cycle: Chokkalingam further said that India is in the final legs of the interest rate hike. "We are set for the reversal of the interest rate cycle which is a big positive for the banking sector because it will boost the investment income. There would be a write-back of depreciation provision made on the bonds, and their holding. So, there will be a lot of significant income from the investments," the expert added.

America may do one or two hikes - 25/50 bps but in India, "either we have already hit the peak or with another 25 bps, we will hit the peak because retail and wholesale inflation have come down dramatically. So, unless monsoon fails miserably, the banking sector will be the best-performing sector in both Sensex and Nifty, among all the sectors in the 2023-24 financial year," the analyst added. 

Asked about specific names the expert is bullish on, he replied HDFC Bank and Bank of Maharashtra. Chokkalingam said Bank of Maharashtra imitates HDFC Bank, in terms of quality and parameters. The only difference is that it is small in size. The analyst also clarified that he doesn't own these stocks in his portfolio.