SBI, HDFC Bank, Kotak Mahindra Bank, ICICI Bank and Axis Bank shares rose on Monday, helping the Nifty Bank extend gains to a third straight day after a fortnightly reading from the Reserve Bank of India (RBI) showed credit growth in the sector surged to the highest since November 2013. The latest RBI data comes on the onset of the festive season in the country, and days after optimistic commentary from chief of the country's largest lender by assets.
Credit growth — a key measure of demand for lenders — came in at 15.5 percent in the week ended August 26 compared with the corresponding period a year ago, according to RBI data. In the week ended November 1, 2013, it had stood at 16.4 percent.
Banks and other financial institutions are hopeful of a pickup in business momentum on the back of aggressive hikes in COVID-era interest rates to tame red-hot inflation.
The festive season in the country typically leads to higher consumer demand, which aids the profitability for lenders as people borrow more.
Analysts expect the banking pack to aid the overall gains on Dalal Street though some warn of overheated valuations.
Rupal Agarwal, Senior Research Analyst-Asia Quantitative Strategy at Bernstein, is cautious on India from a short-term view citing persistent macro risk. However, the Indian market has been relatively much more resilient on account of a strong domestic story and some external factors, she told CNBC-TV18.
Agarwal prefers larger banks from the basket given their less cyclical nature.
"The most important bullish factor behind India's market outperformance is the strong growth recovery underway in the country. The RBI's report on bank credit growth is an endorsement of this fact," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
"The Bank Nifty's outperformance to the Nifty50 is a reflection of this strong undercurrent in the banking segment," he said.
The banking basket has outperformed the overall market for past several weeks and running. The banking index has rewarded investors with a return of almost 22 percent in three months, a period in which the Nifty50 benchmark has risen 13.8 percent.
SBI, ICICI Bank, Axis Bank and IndusInd have grown investors' money by at least one-fifth in the three-month period, aiding the overall gain for the sector.
Morgan Stanley believes Indian banks are set for another round of rerating given that the catalysts are falling into place. It sees accelerated capital expenditure to contribute to sustained loan growth for commercial banks going forward.
"Strong balance sheets, lessening macro concerns, and improving capacity utilisation set the stage for a capex up-cycle in FY24-25, which we think could drive a second leg of re-rating at Indian Banks," Morgan Stanley said in a note released last week.
A rerating of the banking space could mean even better participation of the sector on Dalal Street.
However, some are skeptical of high overall valuations in Indian equities, which come in the way of more upside for over-owned stocks.
Agarwal of Bernstein warns of an overall slide in the market below its recent lows for a number of factors not completely factored in:
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