Asset quality normalisation and return of credit growth have brought some of the regional, public sector bank, and mid-tier bank stocks back on investor radar, according to Kotak Securities Ltd (KSL).

“Payment activity stayed strong in August. Loan growth improved to 15 per cent Year-on-Year (YoY) led by retail and MSME. Both lending and deposit rates continued their upward march in this rising rate environment,” said KSL analysts M B Mahesh, Nischint Chawathe, Ashlesh Sonje, Abhijeet Sakhare, and Varun Palacharla, in a report.

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The analysts observed that they are clearly seeing a dramatic shift in stance from lenders on growing the loan book given that asset quality has normalised and banks do not face any capital-related challenges.

“Credit demand also seems to be picking up, but we await more convincing signs,” they said.

Healthy credit growth

Most banks have reported healthy credit growth resulting in the recent broad-based rally, with the mid-tier and non-frontline banks benefitting additionally from steady performance on asset quality, per the report.

“While bank managements have reported not witnessing any macroeconomic deterioration on the ground, it continues to be an overhang for investors,” the analysts said.

The analysts underscored that daily payments data for August 2022 from Reserve Bank of India indicates strong trends in payments continued.

“We are in a seasonally weak period from a retail spends perspective but the yearly growth trends are still quite solid, especially when we look at the credit card data.

UPI transactions also continue to show strong trends largely at the expense of debit cards, which have seen sluggish growth,” according to the report.

The anaysts noted that bank credit growth has accelerated further by 15 per cent, primarily led by retail (up 19 per cent YoY) and MSME segments.

Housing (up 17 per cent YoY) and credit cards (up 28 per cent YoY) are leading the recovery in loan growth in retail segment.

Positive stock price momentum

The analysts said August was another month of positive stock price momentum for the Banking, Financial Services and Insurance (BFSI) sector (Nifty Bank index was up about 6 per cent Month-on-Month (MoM) in August 2022 after the rally of about 13 per cent in July), they said.

They observed that among the frontline private bank stocks, ICICI Bank rallied about 8 per cent during the month, while HDFC Bank and Axis Bank rallied by about 4 per cent.

State Bank of India stock was broadly flat. Karur Vysya Bank, Bank of Baroda and Punjab National Bank were among the best performing stocks under our coverage (up about 13-17 per cent mom),”per the analysts.

On a 12-month horizon, public sector banks and regional private banks have significantly outperformed the Bank Nifty, they said.

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