After best-ever performance in FY23, can India banks keep up the pace in FY24?

Amidst the fallout of some of the major banks in the US and Europe a couple of months back, money managers went gung ho on the domestic banking sector and continued to recommend staying invested in them.

This is because of a strong balance sheet, diversified portfolio and significantly lower bad loans in the system.

“The Indian banking system remains sound and healthy, with strong capital and liquidity positions, improving asset quality, better provisioning coverage along with improved profitability,” Reserve Bank of India Governor Shaktikanta Das had said in his policy statement in April.

Post Covid, despite the low interest rate and easy liquidity environment, banks in India weren’t aggressive on lending, and were rather focussing on cleaning their balance sheet.

This particularly has been more visible among public sector banks, which saw a significant decline in bad loans and provisions and reported huge profits.

The net non-performing asset (NPA) trend of banks in the last 5 years reflects the same. In FY19, India’s largest lender State Bank of India reported net NPAs of nearly Rs 66,000 crore. This number came down drastically to over Rs 21,000 crore in FY23. Mid-tier Indian Overseas Bank’s net NPAs, which were as high as Rs 14,400 crore in FY19, were down to Rs 3,300 crore in FY23.

In FY19, 10 banks, of which, 9 are state-owned, reported losses due to significantly higher provisions and bad loans. However, all banks reported profits in FY23, with the number even being the highest ever for some of them, and SBI being one of them.

IDBI Bank reported the biggest loss in FY19 among its public sector peers. After reporting a massive loss of more than Rs 15,000 crore in FY19, the lender reported a profit of Rs 3,645 crore in FY23.

Punjab National Bank, the country’s second largest public sector lender reported a profit of Rs 2,500 crore in FY23, compared to the over Rs 9,900 crore loss in FY19.

Bear in mind that the strong credit growth in FY23 came despite a steep hike in interest rates by the central bank to tame inflation.

From Bottom to Top
According to analysts, the financial sector has had one of its best times post Covid.

Public sector banks, barring State Bank of India, were never among the preferred bets for Dalal Street investors given their low return on equity and stressed books.

However, the tables turned and PSU banks made it to the top of investors’ preference over the last couple of years.

Among PSU banks, SBI and Bank of Maharashtra have given multibagger returns to investors in the last 5 years. Among private banks, ICICI Bank stock saw its value treble in the last 5 years.

If we look at the last 1-year performance, then 9 banks have turned multibaggers, including J&K Bank, Karnataka Bank, South Indian Bank, UCO Bank, Ujjivan Small Finance Bank, Punjab & Sind Bank, Karur Vysya Bank, IDFC First Bank, and Equitas Small Finance Bank.

The Big Bet

An analysis by Motilal Oswal Financial showed that the profits of aggregate financial companies in Nifty 50 swelled to Rs 2,10,000 crore in FY23 from Rs 45,000 crore in FY18.

“Profits are up almost five times in 5 years for financials. Going forward, over the next two years, we are expecting this profit pool to touch about Rs 3 lakh crore in Nifty,” says Gautam Duggad, head of institutional equities at Motilal Oswal.

Given the headwinds to growth in developed economies, most money managers are going overweight on the domestic-oriented sectors in FY24, and financials is at the top of the list.

“I think India as an economy is growing, credit growth is strong and in an interest rate environment like now, I think financials are a good place to be because it is a good play on many-many sectors of the economy, including capex, industrials, retail, corporate,” says Punita Kumar Sinha of Pacific Paradigm Advisors.

Neeraj Chadawar of Axis Securities believes that improving operational and financial metrics and return ratios provide a better re-rating opportunity amongst some mid-tier and smaller banks.

So, with an “All is Well” tag from the market mavens, Dalal Street bulls are prepped for another year of jolly ride in the banking sector.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)