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Make bank with banks!

Banking stocks make up a key component of the Indian equity markets. And right now, something quite promising seems to be brewing in the banking sector.

For instance, the SBI recently posted its highest-ever quarterly (Q4 FY2024) and fiscal year (FY2024) profit. And PSU banks taken together have seen a 4.5x increase in their net profit over the three years ending in Q4 FY2024. 

Banks on the up-and-up

Such news is already encouraging, but it gets even better: there are several more factors that are currently making bank stocks quite attractive. 

1. Prolonged underperformance may lead to possibility of turnaround

The Nifty Bank index tracks a basket comprising 12 key public and private bank stocks. Over the past 20-odd years, this index has typically outperformed the Nifty 50 index (in terms of its CAGR over 5-year rolling periods).

However, for the past 3 years, the Nifty Bank index has been lagging behind the Nifty 50 index1: this stretch of underperformance is the longest-ever, and is FIVE TIMES LONGER than the second-longest such stretch.

There could be some mean reversion in the near future.

Source – MFI Explorer. Data Period: 01-Jan-00 to 30-Apr-24. CAGR – Compound Annual Growth Rate.

2. Reasonable valuations

While Indian equities as a whole are currently being seen as overvalued, the banking sector is better placed on this front, with a price-to-book (P/B) ratio that’s relatively close to its 10-year average P/B ratio (the P/B ratio measures the extent to which a stock’s price is in line with the corresponding company’s book to its book value).

Banks P-B ratio
Source – Bloomberg. Data as on 30-Apr-2024. PB – Price to Book Ratio.2

Thus, banking as a sector right now seems to offer a good entry point.

3. Healthier metrics

Banks have been posting healthy figures for various key metrics, including credit and deposit growth, return on equity, and return on assets.

Source – CMIE, RBI, Internal. Data as on 31-Dec-2023. Credit Growth considers Non-Food Credit. Deposit Growth considers Demand and Time deposits.

In addition, rising recovery rates from defaulters have helped banks bring down their levels of NPAs (non-performing assets), with non-performing loans falling to record lows earlier this year. 

Source: RBI, Kotak. Data as on 31-Dec-2023. NPA – Non-Performing Assets.

The best way to invest in banks

Individual banks differ in terms of their margins, assets, NPA levels, etc., due to which their stocks also vary a fair amount in terms of performance. So if you’re willing to analyse individual stocks, you might want to invest in specific banks. However, such an approach not only demands time and expertise, it can also be more risky.

Conversely, you could invest in the cream of the banking sector by investing in a fund that tracks the above-mentioned Nifty Bank index, which effectively reflects the overall performance of the 12 most important banking stocks.

Bank nifty components
Source: NSE. Data as on 30-Apr-2024.

Such an approach poses a relatively lower level of risk due to diversification. In addition, the Nifty Bank index has posted excellent long-term performance. Since January 2000, the Nifty Bank index has grown 67x, while the Nifty 50 index has only grown 21x. This means a portfolio invested in the Nifty Bank index would have been 3 times larger than one which invested in the Nifty 50 index!

Source: MFI Explorer, Internal data as on 30-Apr-2024.

The Nifty Bank index also tends to deliver better returns than the Nifty 50 index for a broad range of rolling periods.

Bank nifty median rolling returns
Source: MFI Explorer, Internal. Data Period: 01-Jan-00 to 30-Apr-24. Returns above indicate annualised returns.

Strike while the iron is hot

To sum up, the banking sector has several factors in its favour, as detailed above. However, if you’re interested in investing in this sector, doing so right now might be better than waiting. Why? Because valuations (and hence stock prices) are relatively fair and reasonable right now, and there could be some mean reversion which results in a pick-up in the sector’s performance.

We at DSP have made it very simple for you to invest in the banking sector. If you’d like to speak with an expert about this, click here. Alternatively, click the button below to get started.

DSP Nifty Bank Index Fund

1 'Nifty Bank index' refers to the Nifty Bank TRI, and 'Nifty 50 index' refers to the Nifty 50 TRI.

2The Sectors are represented by following indices: Banks - Nifty Bank, Auto - Nifty Auto, Pharma - Nifty Pharma, IT - Nifty IT, Metals - Nifty Metal, FMCG - Nifty FMCG, Energy - Nifty Energy, Realty - Nifty Realty, Infra - Nifty Infrastructure.

 

Disclaimer

In this material DSP Asset Managers Pvt. Ltd. (the AMC) has used information that is publicly available, including information developed in-house. Information gathered and used in this material is believed to be from reliable sources. While utmost care has been exercised while preparing this document, the AMC nor any person connected does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional advice. The statements contained herein may include statements of future expectations and other forward looking statements that are based on prevailing market conditions / various other factors and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The sector(s)/stock(s)/issuer(s) mentioned in this document do not constitute any recommendation of the same and the schemes of DSP Mutual Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s). All opinions/ figures/ charts/ graphs are as on date of publishing (or as at mentioned date) and are subject to change without notice. Any logos used may be trademarks™ or registered® trademarks of their respective holders, our usage does not imply any affiliation with or endorsement by them. These figures pertain to performance of the index and do not in any manner indicate the returns/performance of the Scheme. It is not possible to invest directly in an index.

The investment approach / framework/ strategy mentioned herein are proposed to be followed and the same may change in future depending on market conditions and other factors. Detailed methodology can be found here.

Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments.

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