The 12-stock Nifty Bank has grown by 16% over a 1-year period versus Nifty’s 29% in the same time. Realty towers over its other sectoral peers followed by power stocks. Nifty Realty’s 1-year returns stand at 83% while BSE Power has yielded 79% returns. Others including Nifty IT, Nifty Pharma, Nifty Oil & Gas, Nifty Auto and Nifty Metal have risen between 36% and 75%. Meanwhile, BSE Cap Goods index has jumped by 59%.
The index’s underperformance is largely on the back of lackluster show by the private banks. In this, HDFC Bank has given returns of just 3% over a 1-year period while Kotak Mahindra Bank and IndusInd Bank have just managed to remain positive. Lower rung banks (in terms of index weight) like IDFC First Bank, Bandhan Bank and AU Small Finance Bank have seen their share prices erode by 23%, 13% and 2%, respectively. Though ICICI Bank and Axis Bank have outperformed Nifty Bank with returns of 27% and 20%, they have underperformed Nifty.
PSU Bank stocks have done much better with Punjab National Bank (PNB) taking the limelight with 72% returns, followed by State Bank of India (SBI) which has delivered 43% returns. Bank of Baroda’s (BoB) 1-year returns stand at 25%.
In response to an ETMarkets query, Master Capital Services said that private banks have remained laggards in the current phase because of valuation concerns. The brokerage finds current valuations expensive in case of private lenders as compared to public sector banks.
The April-June quarter results also pointed to the concerns around deposits, pressure on NIMs along with moderation in unsecured loans.
“The banking sector reported a soft quarter amid tepid business growth, NIM moderation, and a slight increase in provisioning expenses (particularly lenders having a higher mix of unsecured segments such as MFI and credit cards,” Deepak Jasani, Head of Retail Research, HDFC Securities said. NIM contracted for most banks as cost pressures persisted amid intense competition for liabilities and continued pressure on CASA mix, Jasani added.
Mihir Ghelani, CEO at Kai Securities sees headwinds emanating at the cash-to-deposit ratio front, which he said has been declining sharply and was significantly impacting bank earnings. “This deteriorating ratio indicates that banks are experiencing a reduction in the liquidity available to them relative to their deposit base, leading to diminished financial performance. The decline in this ratio is influencing the overall market sentiment and performance of the Nifty and Bank Nifty index,) Ghelani lamented.
The average profit after tax (PAT) of the Nifty Bank constituents stood at 32% year-on-year while net interest income (NII) jumped by 17%. PNB reported the highest growth in YoY PAT at 159% and was followed by Kotak Mahindra Bank at 81%. HDFC Bank reported a 35% YoY uptick in its net profit while Bandhan Bank and AU SFB reported a PAT growth of 47% and 30% respectively. SBI and IndusInd reported 1% YoY gains while IDFC First Bank was the only one to post a net profit decline on the YoY basis at 11%.
Select large private banks also reported higher slippages due to seasonal stress in the agri portfolio.
Asset quality remains a key monitorable for private and PSU banks and one hopes that the attractiveness of PSU Banks does not get diluted due to fresh asset quality issues, Jasani hoped.
Recounting the positives from the Q1 performance of lenders, Master Capital Services highlighted how most banks in the Nifty Bank index reported solid loan growth, driven by rising demand in both retail and corporate sectors. Furthermore, the net interest income improved and most banks, especially the larger ones, continued to maintain strong capital adequacy ratios.
Going ahead, the street expects loan growth to remain strong and with a buoyant economy, certain private banks could come out of their prolonged underperformance.
Outlook
Ghelani of Kai Securities expects the underperformance to continue in bank stocks and rules out any near term positive trends in the Nifty Bank index. This analyst presently remains underweight in not just the banking sector but the overall market. “This cautious stance reflects our assessment of the sector’s current challenges and market conditions, which have led us to reduce our exposure. Our decision is driven by concerns about ongoing issues such as declining bank earnings and broader market uncertainties. By maintaining a reduced allocation, we aim to manage risk and align our portfolio with our strategic outlook,” Ghelani said.
His investment strategy involves holding a smaller proportion of banking stocks and broader market assets compared to their representation in the benchmark indices.
Jasani of HDFC Securities also sees challenges persisting for the sector with sluggish deposit momentum exerting pressure on net interest margins (NIMs) along with signs of moderation in the unsecured loan segment. However, with fund deployment in equity markets and other avenues becoming “less attractive”, investors could look for opportunities in laggards, this analyst said.
Spelling out its stock strategy, Master Capital recommends accumulation in ICICI Bank and HDFC Bank shares while suggesting profit booking in the PSU banks.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)