Nifty Bank reaches a new high with 12% gains; SBI, ICICI Bank, and Kotak account for 60% of the index value

The Bank Nifty is on a roll, especially after the sharply improved performance of banking sector companies in the last one few quarters. We will come back to the performance story later. Obviously, a handful of banks like HDFC Bank, ICICI Bank, SBI and Kotak Bank have accounted for a bulk of the move in the Bank Nifty index. In fact, if you look at the break-up of the spike in Bank Nifty over the last 2 months, it is SBI, ICICI Bank and Kotak Mahindra Bank that accounted for more than 60% percent of the increase in the market capitalization of the Bank Nifty. But, first let us look at some interesting statistics on the Bank Nifty.

What the numbers say about Bank Nifty?

The table below captures the components of the Bank Nifty and the returns over a 1 month period, 1 year period and the distance from the 52-week High and 52-week Low.

Data Source: NSE

 The above table covers the components of the Bank Nifty index with the overall index values shown in the last row. Here are some key takeaways from the Bank Nifty performance in the table above.

• Out of the 12 banks in the Bank Nifty index, 10 banks have given positive returns in the last 1 year with only Bandhan Bank and AU Bank giving negative returns in this period.
   
• If you look at the monthly performance, you find 8 of the 12 banks giving positive returns. AU Bank and Bandhan Bank, which gave negative returns over last one year have given the top returns over the last one month.
   
• Most of the banks in the above list, barring HDFC Bank and PNB, are actually trading much closer to their 52-week high levels. This is a clear indication of the strength in the banking sector overall.
   
• Finally, if you look at the index of Bank Nifty overall, it has generated returns of 2.5% in the last one month and a return of 24.4% in the last one year. In fact, the Bank Nifty has gained nearly 12% in the last 2 months.

Clearly, the above data hints at substantial strength in the Bank Nifty, so let us look at the story behind the rally in the Bank Nifty.

Record highs for the Bank Nifty

With much better than expected earnings by banks in the March quarter, the banking stocks have done exceptionally well with a lot of buying coming into the  counters. In the last 2 months, when the Bank Nifty has rallied by a full 12%, just 3 banks viz. SBI, ICICI Bank and Kotak Bank contributed nearly 60% of the market cap accretion. Nifty gained 10% in this period, so the Bank Nifty has done better than that. Just to give a stock specific picture, SBI, Kotak Bank and ICICI Bank contributed to market cap accretion of ₹1.80 trillion during the last 2 months out of the ₹3 trillion accretion in the market cap of Bank Nifty. That is a good 60% contribution from just 3 stocks.

However, it was not just these 3 banks. If you add up the contribution of Axis Bank, HDFC Bank and IndusInd Bank; it added up to another 22%. Effectively, out of the 12 stocks in the Bank Nifty, the big 6 stocks accounted for 82% of the total market cap accretion of these bank. The rally is not just firm, but also it is extremely aggressive and rapid. Here is a sampler of the last 2 months. SBI gained 16%, ICICI Bank 12%, Kotak Bank 15%, Axis Bank 12%, and IndusInd Bank 24%. Only HDFC Bank gains at 3.3% were relatively subdued, but that was more due to the overhang of the reduction in MSCI weight post-merger.

Story of how banks flattered in Q4FY23

To sum it up, it is a story of bottom lines. Banks have reported amazing growth in net interest income and expansion of net interest margins. In short, it is a game of NII and NIMs that resulted in such fabulous returns on banking stocks. Here is a quick sampler.

• SBI reported 83% higher profits for Q4FY23 at ₹16,695 crore and record annual profits of ₹56,000 crore, the second highest in corporate India.
• ICICI Bank, HDFC Bank, Axis Bank and other PSU banks like BOB also reported stellar growth in NII and in NIMs. It has been a case of deposit costs not keeping pace with the rise in loan yields for banks. All these banks also witnessed substantial reduction in provisions as well as reduction in the gross NPA levels
   
• While the case of Kotak Mahindra was also about improved financial performance, it also had an MSCI upgrade that helped the stock higher in the last 2 months. For instance, the stock rallied on its enhanced weightage resulting in potential flows of $800 million as passive fund adjusted to changes in the passive fund tracking.

But, it may not be roses all the way as S&P Global Ratings expects profitability of Indian banks to stabilise at a robust level, with only asset quality improving. According to S&P Global Ratings, the Indian banking sector is experiencing a strong recovery, with nearly the best results declared in the last 10 years. However, incremental benefits from the loan yield / deposit gap may reduce. There is unlikely to be pain but the incremental edge will reduce. But, the rally has been fairly good and it is time to celebrate the Indian banks.