Bank stocks’ record rally continues as balance sheets and credit growth improve

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Non-performing loans at all lenders have decreased significantly. (File)

Bombay:

Indian lender stocks have rallied this year to hit a record high today and analysts believe the party is likely to continue as banks released robust earnings reports for the latest quarter.

The Nifty index for public sector banks is up about 50% so far this year, and the banking index is up about 17%, comfortably outperforming the benchmark Nifty 50 index’s gain of about 4%.

This comes at a time when loan growth has reached a multi-year high and non-performing loans have declined significantly across all lenders.

“A well-capitalized balance sheet, improved credit growth and lower borrowing cost forecasts are positive catalysts that should allow valuation multiples to improve as macro stability returns,” Nomura analysts said in a report earlier this week.

The brokerage firm said private and sovereign lenders that remain better positioned for growth include ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, IndusInd Bank Ltd, Bank of Baroda Ltd and State Bank of India (SBI).

“Bank stocks are expected to continue their rise for the time being as all banks have seen an increase in loan growth and net interest margins have also improved,” said Asutosh Mishra, analyst at Ashika Stock Broking.

Loan growth is at a multi-year high, with an uptrend in both retail and corporate loans.

Indian banks registered a 17.9% year-on-year increase in loan growth in the two weeks ended Oct. 21, central bank data showed, and market participants expect growth to accelerate in the coming months.

Nevertheless, Mishra warned as a precaution.

“A key concern remains how the scenario of rising interest rates will affect credit growth.”

While most lenders have revised upwards their loan growth targets, central bank data shows deposits have grown by under 10%.

The growth rate of deposits remains a “nagging problem,” broker Macquarie said.

Some like SBI, the country’s largest lender, are trying to unwind Treasury investments to boost deposit growth, while smaller lenders like Yes Bank Ltd and RBL Bank Ltd are turning to digital channels.

Another bright spot for Indian lenders is improving asset quality, Macquarie noted.

“Debit bounce rates are at their lowest in four years, indicating very strong asset quality results, as reflected in banks’ cost of borrowings reporting this quarter.”

(Except for the headline, this story was not edited by NDTV staff and was published by a syndicated feed.)

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