Banking Sector: Can it act as a strong support for Nifty?

Indian Markets have been on a roll in the last couple of weeks, where strong traction has been witnessed in the index from the lower levels. In the past few months, financial markets have witnessed heavy volatility as Inflation soared, and the Central Banks, to curtail the rise of Inflation, increased the interest rates rapidly, leading to multiple issues and bank failures globally.

Now the question for the investors is how the road will be further as we enter the new financial year 2023-2024. The markets have started factoring the corporate earnings, and many index heavyweights have declared their earnings. In this, the banking sector has become an outperformer, where most banks have given good quarterly results with robust performance on all parameters. On the flip side, the earnings from the Information technology heavyweights have been very weak.

Let’s look at how the big banks have reported their fourth-quarter numbers till now.  

HDFC Bank: India’s largest bank by market capitalisation reported a 31% YoY rise in Total Income to Rs 53,851 crore. Consolidated Revenue grew by 21% YoY to Rs 32,082 crore. Net income grew by 24% YoY, and Net Profit rose by 20% YoY to Rs 12,047.5 crore. Asset Quality also improved. NNPA came at 0.27% for the quarter. The company has declared a dividend of Rs 19/ equity share.

ICICI Bank: ICICI Bank Ltd. reported a 30% YoY jump in standalone Net Profit at Rs 9,122 crore. Net Interest Income rose 40.2% YoY to Rs 17,667 crore, while the NIM margin widened to 4.9% from 4%. Banks’ Asset Quality also improved, with GNPA coming at 2.81%. The total capital adequacy ratio was 18.34%. The company has declared a dividend of Rs 8/share.

IndusInd Bank: IndusInd Bank reported good numbers where the Standalone Net Profit surged 49.88% YoY to Rs 2040.51 crore. Net Interest income rose 17% YoY to Rs 4669.46 crore. However, the asset quality weakened to 1.98% against an estimated 1.94%. The Board declared a dividend at Rs 14/equity share.

Other big banks like Axis Bank and Kotak Bank are scheduled to report their quarterly numbers this week.

The trend of delivering good numbers can be seen in smaller banks as well. Where banks like

AU Small Finance Bank:  reported 22.7% YoY growth in Net Profit to Rs 424.6 crore Net Interest Income came in at Rs 1213.3 crore, which increased by 29.54% YoY. The Asset quality also strengthened. GNPA declined to 1.66% in the quarter from 1.81% in the previous quarter. The company declared a dividend of Rs 1/share.

Other banks, like the Bank of Maharashtra, reported good numbers where the quarterly profit more than doubled YoY.

We can see that the numbers reported by the banking companies up till now have been very encouraging. In many cases, these numbers have come at multi-quarter to multi-year highs. This positive sentiment can also be seen in the share prices of these banking companies, where the share prices have rallied in the past few days.

Technically Bank Nifty at 42678 has broken above the previous resistance zone of 42000 and is trading near its next resistance of 43070.

As a major part of the Nifty50 Index comprises Banking shares, we can expect Bank Nifty not only to provide support to the Nifty in the coming days but also to propel Nifty above 18000 levels.

Our Advice

The results season is not yet over, and many big-ticket companies are yet to report their numbers. Upon completing this results season, we would be able to calculate EPS for Nifty and thereby calculate its fair value. Until then, we recommend that investors stick to and look for opportunities in Large Cap Banking names and avoid small-cap banking names as of now owning to the global uncertainty around small banking shares. Example SVB.

Any retracement in Large Cap banking companies poses a good buying opportunity to accumulate in a phased manner with a long-term view.