What next for Bank Nifty after hitting fresh all-time high today? Credit growth may fall, deposits to improve

Bank Nifty hit a new all-time high of 44,486.35 on Tuesday – just a whisker above yesterday’s high – as market sentiment improved and analysts turned bullish on bank stocks. Bank Nifty has jumped 3.1% year to date, outperforming the Nifty 50, which has gained 2.7% YTD. The recent surge suggests that the ongoing global banking crisis has no significant impact on the Indian banking system and the balance sheets are much more resilient than they were historically in terms of capital buffer, credit quality and liquidity aided by stringent regulatory frameworks. Analysts expect the operating environment of Indian Banks to likely stay healthy for FY24E, which may translate into stable ROA despite moderation in credit growth and margin compression. 

Why is credit growth expected to come down?

There has been a strong credit demand because of higher capex, robust working capital needs and growth in unsecured pockets, said analysts at LKP Research. “The credit and GDP growth stood higher than the M3 growth which signals strong consumer confidence. Nonetheless, we may witness a moderate economic slowdown in FY24E (RBI/Govt./IMF consensus). The expected nominal GDP growth for FY24E is around 11% and the credit –multiplier (pre – covid was around 1.2x. Therefore, we are estimating a system-level credit growth of ~13% for FY24E,” analysts added. They further expect NIMs reduction because of the rising cost of deposits and minimum benefits of EBLR re-pricing and ROA to stay stable considering lower credit costs which may counterweight the negative impact of NIMs compression.

Deposit growth expected to improve in the next financial year

The deposit competition is intense among banks, according to LKP Research. “A higher liquidity requirement and CDR bottleneck (majorly PVBs) are likely to boost deposit traction as the lagging deposit re-pricing may increase the COD (cost of deposit) across SCBs. Private sector banks (PVBs) are more prone to deposit re-pricing as the CDR is at a threshold level. However, public sector banks (PSBs) have a comfortable CDR level and carry ample liquidity,” analysts said.

Why is the Bank Nifty rising?

“The surge in Bank Nifty is driven by a robust economic growth forecast of 7.5% for FY23, significant improvement in asset quality with gross non-performing assets (GNPAs) declining to 4.9% in March 2023, banks’ strong emphasis on digital transformation, and increased foreign investor interest. Remarkably, the banking sector led in earnings for the March quarter, underlining its strong performance,” said Sonam Srivastava – Founder at Wright Research. She believes that while there are risks, such as rising interest rates by the RBI to control inflation and potential global economic slowdown that could impact the Indian economy, the overall outlook for the Indian banking sector continues to be positive, with the expectation of consistent growth in the foreseeable future.

Bank Nifty Outlook

Bank Nifty may rise to 45000 in the coming days

“Bank Nifty on Monday managed to close firmly above the breakout area suggesting a move towards 45000 is possible to be seen in the coming days. Since Bank Nifty has witnessed fresh breakouts, unlike Nifty, which has been trading considerably above the previous breakouts, one can expect strong outperformance by Bank Nifty going forward,” said Gaurav Bissa, VP – InCred Equities.

Bank Nifty strong support at 43500-42600

“Bank Nifty has made a new record high, after spending nearly 2 weeks in a narrow range. We expect the upmove to continue with some intermediate consolidation. Meanwhile, the private banking counters would continue to outshine the PSU pack so traders should plan their positions accordingly. In the case of profit taking, the 42600-43500 zone would act as a strong support,” said Ajit Mishra – SVP, Technical Research, Religare Broking Ltd.

Bank Nifty resistance at 44400-44500

“If Bank Nifty sustains above 44000-44100 on a weekly basis it can show further bullishness and move towards 45000. The resistance is at around 44400-44500 and the support is at around 44000-44100, till the time Bank Nifty breaks this range it is expected to remain sideways. The undertone remains bullish and the buy-on dip strategy can be implemented for the coming weeks. Technical indicator RSI is at around 66 and is showing strength by sustaining above 50 levels,” said Mitesh Karwa, Research Analyst at Bonanza Portfolio.

Brokerage calls: Buy Bandhan Bank; Reduce PNB

Bandhan Bank: Buy – CMP: Rs 264 – Target Price: Rs 320 (21.21% upside) -D&B

“Bandhan Bank is trading at 1.4x FY25e ABV on ROE/ROA of 22%/>2.5%. We are positively biased on the stock. Given the fact that largely NPLs are provided for, improved collection efficiency post-COVID, increased demand and higher growth visibility in micro-finance loan book, make us positively biased on the stock. We assign a target price of Rs 320,” said analysts at Dalal and Broacha (D&B).

PNB – Reduce – CMP – Rs 51 – Target Price – Rs 35 (31.37% downside) – Nuvama

“We cut our earnings by 7%/11% for FY24E/FY25E as we increase opex and credit cost. But, we increase our multiple to 0.5x BV FY25E, from 0.4x on improving asset quality. While RoA will improve to 0.4% in FY25E, but will remain lower than peers. Also, despite improving asset quality, PNB’s GNPL is amongst the highest in the sector. We maintain ‘REDUCE’ with a revised target price of Rs 35 (earlier Rs 31),” said analysts at Nuvama Institutional Equities.