Bank Nifty rises in sync with Nifty50 in H1, experts say can outperform going ahead

Bank Nifty has been rising in tandem with the benchmark Nifty this year so far but with easing lockdowns, faster vaccination pace and sustained fall in COVID-19 cases, it looks poised for clocking healthy gains, say

experts.

In the calendar year so far, benchmark Nifty has gained 12 percent while Bank Nifty has risen 11 percent.

Banking stocks saw a tepid move after the resurgence of COVID-19 cases which posed a risk to their asset quality. As many states imposed strict restrictions in April and May when the second wave was at its peak,

there were concerns that the banking sector was going to see an increase in non-performing assets (NPAs).

Private sector banks, apart from insurance, housing finance, asset finance and AMC companies underperformed due to asset quality concerns, the impact of lockdown on business, etc., as these sectors are sensitive to the economic conditions of the country.

"Banking sector underperformed due to it being extremely sensitive to the performance of the domestic economy. Uncertainties surrounding moratorium and refund of interest-on-interest added to instability," said Vinod Nair, Head of Research at Geojit Financial Services.

New loans growth and maintaining of current assets quality become a challenge as slippages and provisioning increased. Quality of book value diminished due to a rise in actual and implied NPAs, impacting the valuation of banks and cautioned the market," said Nair.

Nifty Bank may outperform Nifty50 

Experts believe bright days are ahead for the sector as economic activities picking pace will increase the demand for capital, putting banks in a sweet spot.

Besides, experts also underscore the management commentary after the Q4 results which, despite COVID- related disruption, focussed on growth and profitability.

"The Q4 management commentary on reversion to growth and profitability reinstalled faith on Bank Nifty. Most large private banks are already sitting on good capital adequacy which will incentivise them to lend and start the growth engine. Smaller PSU players are undergoing privatisation which will enable them to compete against the likes of stalwarts in the industry," said Nirali Shah, Head of Equity Research, Samco Securities.

"Bank Nifty is expected to outperform the benchmark as the banking sector is set to witness a re-rating on account of improving economic outlook, rise in interest rates given the inflationary pressures and India’s focus on growth and profitability," said Shah.

She further added that the banks’ CY2021 earnings may grow on the back of higher credit growth as India’s GDP improves. Furthermore, the government’s efforts on increasing allocation towards capex and the

proposal of forming a ‘bad bank’ will help upgrade the outlook for this sector as a whole.

Nair is bullish on the banking sector, anticipating the revival of the economy.

"We have turned bullish on the banking sector in anticipation of a revival of the economy going ahead. This brings the possibility of its outperformance in the future," said Nair.

"Starting at a slow rate, lending can recover from H2FY22 onwards. RBI supportive measures and funding plans have helped to maintain a strong capital base, high provision ratio and robust balance sheet during tough periods. A strong capital base will act as a catalyst as the economy comes back to normalcy. Recapitalization and privatization will be another add-on factor, leading to the positive outlook for PSB," he said.

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