Investor confidence is reaffirmed by banks' asset quality assessment, and analysts perceive comfort in the valuation

Investor confidence is reaffirmed by banks' asset quality assessment, and analysts perceive comfort in the valuation

Investor confidence is reaffirmed by banks' asset quality assessment, and analysts perceive comfort in the valuation

The gross non-performing (GNPA) ratio of banks reached a new decade low of 3.2% at the end of September 2023, according to the most recent RBI data, although the consolidated balance sheet grew by 12.3% in FY23.

This year, the benchmark Nifty index has risen 19%, but the Bank Nifty index has gained just 12%.

Investor confidence has increased as a result of the Reserve Bank of India's (RBI) report on banks' improved asset quality and balance sheets, potentially sparking an even larger upswing in the financial industry. Over the last month, there have been increases of 7–20% in banking equities, including HDFC Bank, ICICI Bank, SBI, Axis Bank, Kotak Mahindra Bank, and Bank of Baroda. Strong loan offtake, balance sheet cleaning, and favorable valuations are credited with the increase.

Although the soundness of the banking industry has previously been evaluated and the RBI report card is "nothing new," according to VK Vijayakumar, chief investment strategist at Geojit Financial Services, fair pricing in an overheated market It is possible to notice purchasing in banking shares because of their ease.

Convenience in terms of banking share value

"Due to their low valuations and potential for wealth creation, foreign institutional investors (FIIs) would be increasingly interested in HDFC Bank and ICICI Bank as a buying frenzy has begun. Because of their fair prices, banking stocks should continue to perform well in the foreseeable future.An very costly Indian market," he said.

The data indicates that the Bank Nifty index trades at a 16x price-to-earnings (PE) ratio at current market levels, compared to a 23x PE ratio for the benchmark Nifty 50 index.

According to LKP Securities research analyst Ajit Kabi, considering the impressive return ratios seen over the last three years, private banks were trading at values that were a decade below zero. Therefore, reduced valuations can have an effect on the stock's future performance.

The Bank Nifty index hit a new high over 48,500 points, up 12 percent so far this year. In contrast, the NSE Nifty 50 has increased by 19% this year. This year's top banks on the Bank Nifty index are IndusInd Bank, IDFC First Bank, and Punjab National Bank.

According to an RBI study, the gross non-performing assets (GNPA) ratio of Indian banks improved further, hitting a ten-year low of 3.2% in the second quarter of the current fiscal year.

The retail and services industries' credit drove the banks' consolidated balance sheets to grow by 12.2 percent in FY23, the greatest growth in nine years. The study also showed that fewer provisions and greater net interest revenue in FY2013 contributed to increases in net interest margin and profitability.

Low NPA cycle and good loan quality

The NPA cycle is at a low point, according to Kabi of LKP Securities, and bank credit quality will be steady over the next several quarters. He said, "No major NPA formation is likely in CY24," endorsing Canara Bank, ICICI Bank, Bank of Baroda, and IndusInd Bank among the financial companies.

Furthermore, according to the RBI report, all bank groups met the regulatory minimum requirement for common equity tier-1 as of September 2023, with the capital to risk weighted assets ratio (CRAR), which is an indicator of banks' capital adequacy, standing at 16.8%. Used to complete. Ratio of CET1.

Due to the higher percentage of outstanding credit card and personal loans, analysts said that although the RBI's new risk-weighting standards may cause private banks' capital adequacy to decline, sufficient capital may be able to offset the effects.

Because of their steady earnings forecast, Motilal Oswal analysts believe that public sector banks (PSBs) are ready for a re-rating. "Many PSBs have raised capital from the market and increased capitalizing them levels, which will enable healthy balance sheet growth, particular as the capex cycle recovers after the parliamentary elections," he said in a previous note.

The brokerage company recommends SBI, Bank of Baroda, and Canara Bank as top choices and projects PSB growth in a healthy range of 16–22% over FY 2024–2026.