Let’s understand why this upward momentum for banks and other lending players is likely to persist, potentially making Nifty Bank breach new heights.
Asset Quality – Two words but conveys tons of insights. This is the single most important factor to determine the health of a lending institution. Gross non-performing assets (GNPA) which is an indicator to gauge asset quality are in their best shape right now.
The asset quality especially in the corporate and retail segments is showing strong signs of revival. In the corporate segment, banks have undertaken a significant clean-up and strengthened their underwriting practices. As per a recent study conducted by
the share of high-safety exposure in corporate advances has increased to 77% as of FY22 from 59% in FY17, while the exposure to below-par companies has come down to 7% from 17%.
In the retail segment, close to 50% of the portfolio consists of mortgage loans that are secured and have consumers with relatively better credit portfolios. Thus, the asset quality in this segment is expected to not deteriorate.
Capital Adequacy – A bank can only take advantage of the improving quality of customers if it has sufficient capital to lend. Over the past few years, the capital ratios of banks have significantly improved and most banks are sitting on healthy cash.
With cash or in other words ammunition on their side, the banks seem ready to fire!
Credit growth trend – Well, you may have cleaned up your assets and are sitting on cash but what would be the use of that excess cash if there is no demand for credit? Fortunately, this is not the case this time.
After a mutated credit growth in the past couple of years, the demand has started to pick up. Retail and SMEs have driven credit growth. But now with improving capacity utilization, a significant reduction in the corporate tax rate, and government incentives under PLI for the manufacturing sector the corporate segment too is expected to join the party.
Growth to come with margin expansion – The special thing about this time is that not only will the top line grow at a good pace but the operating profit will be getting enhanced too. Empirical evidence and history suggest to us that rising interest rates are favorable for the net internet margins of the banks.
The banking sector is standing at the cusp of a broad-based credit up-cycle. The tailwinds are coming in from all directions. The retail demand will drive the corporate profitability & capacity utilization which in turn would drive corporate loans. Similarly, the improvement in the corporate segment would result in job creation and in turn drive retail demand. “Momentum begets momentum” – This physics principle would make sure the force stays with the banking segment.
Nifty started the week on a positive note and even recovered significantly after a gap-up opening on Tuesday. However, it couldn’t sustain at higher levels and slipped lower. Last week, we highlighted that a bearish divergence was forming which could result in a slowdown in upward momentum. We have seen a significant correction from the recent highs and it seems that bears could drag the index even more. Immediate support is now placed around 17,200 and 17,000 levels. If the index breaks this level, then we could see it drag lower to 16,600. On the upside 17,500 could act as a resistance.
Expectations for the week
Globally, the markets will be reacting to the much-anticipated GDP growth numbers of the USA. The GDP growth rate announced in the second quarter witnessed a drop of 0.6% which came in better than expectations after witnessing a steep fall of 1.6% in Q1. Global markets will have their keen eye on this figure as it could influence the future course of rate hikes by the fed. Back home, the outcome of the RBI MPC meeting will be taking the center stage. The retail inflation picked up again in August to 7% after declining for three months in a row. The market expects the repo rake to be hiked by 50 bps. Further, the data on foreign exchange reserves which have declined by 14% from their all-time high will keep the markets on their toes. Nifty50 closed this week at 17,327.35 down 1.16%.