After ICICI Bank boost, can Street pin hopes on banking stocks now?

Market veteran Nilesh Shah expects stock-specific action in the banking basket in the coming days. There is room for a further rally in the space as good earnings reports from leaders trigger a catch up in banking names, he said in an interview to CNBC-TV18. Some stocks needed to correct after surging too much, he said.

The Managing Director of Kotak Mahindra AMC was referring to strong gains in the pack in the recent times.

On Saturday, ICICI Bank posted a 29.6 percent YoY jump in net profit to Rs 5,511 crore in Q2, beatings estimates of Rs 5,339.3 crore by analysts in a CNBC-TV18 poll. Its gross NPAs at 4.82 percent and net NPAs at 0.99 percent were better than 5.15 percent and 1.16 percent in the previous quarter respectively. Net interest income -- the difference between interest earned and interest spent -- grew 24.5 percent to Rs 11,689.7 crore, Rs 536.6 crore more than analysts' prediction.

HDFC Securities raised its target price for ICICI Bank a 5.1 percent lift to Rs 885 after the earnings announcement, retaining its 'buy' rating on the stock.

ICICI Bank beat the brokerage's estimates by 13 percent. HDFC Securities said the lender posted a strong operating performance to maintain its growth momentum, raising its FY23 earnings forecast by 1.6 percent, though lowering its FY22 projection by 0.3 percent to "factor in higher loan growth, partially offset by higher operating expense. (Read more on ICICI Bank Q2 results)

Axis Bank, Canara Bank and Kotak Mahindra Bank will post their quarterly numbers on Tuesday. IndusInd Bank, Indian Overseas Bank, Indian Bank, RBL Bank, Karnataka Bank and Bandhan Bank will report their results later this week.

Many banks have started to improve their asset quality and growth has started to return to the sector, said Nischal Maheshwari, CEO-Institutional Equities at Centrum Broking. "Banking seems to be turning the corner at the moment," he said. On ICICI Bank, however, he advises patience, suggesting investors to wait for a correction to below Rs 800 before going long. The stock has run up "quite a bit", he said.

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The worst of the bad loans cycle appears to be over, according to Santosh Meena, Head of Research at Swastika Investmart. He believes the country's banking system is in a sweet spot to support the economy.

"We are seeing significant improvement in the asset quality and the loan growth is likely to get momentum soon on the back of a strong recovery in the economy. The cleanup process has been done which was undergoing for more than five years," he told CNBC-TV18.com.

"It is time to gear up the credit cycle thanks to the government's capex program where the private cycle may also get momentum soon. Banks have adequate liquidity and corporates are ready for fresh capital expenditure after deleveraging their balance sheets," added Meena, whose top picks are ICICI Bank and SBI.

"We are very bullish on the economy-facing stocks especially corporate banks like SBI and ICICI Bank. Both are showing strong growth in NIMs and loan books with significant improvement in asset quality. There is valuation comfort because SBI is still trading at a price-to-book value ratio of 1.6 vs HDFC Bank's 4.5... Inflation could be a key risk factor that may lead to some intermediate correction otherwise I don't see any major headwinds," he asserted.

Earlier this month, HDFC Bank -- the country's largest lender by market value -- reported a 17.6 percent YoY jump in net profit to Rs 8,834.3 crore in Q2, beating Street estimates. Analysts in a CNBC-TV18 poll had predicted a net profit of Rs 8,796.8 crore.

Its NIIs grew 12.1 percent to rs 17,684.4 crore, as against analysts' prediction of Rs 15,776.4 crore. HDFC Bank's gross NPAs decreased to 1.35 percent in Q2 from 1.47 percent in Q1, and net NPAs to 0.4 percent from 0.48 percent. (HDFC Bank Q2 results)

Some consolidation can be expected in the banking space on Dalal Street following "a big outperformance", said Motilal Oswal Financial Services Head-Equity Strategist Hemang Jani.

"We may see some cooling off in banking names, which have done so very well in the last, let us say, a couple of weeks, from a short-term perspective. Despite the momentum, we think that it makes sense to kind of be a little watchful about what sort of numbers and upgrades are we going to see from banks like Axis Bank and SBI, because expectations have really gone up post-ICICI Bank numbers," he said.

Jani is positive on the banking because of valuations being comfortable and the quarterly numbers. "But it makes sense to be a little more cautious and guarded rather than going with the flow," he warned.