Banking on banks

The bulls have taken a liking to the banks, with the Indian economy clocking an impressive GDP growth of more than 8% in the first quarter

The current rally has seen the BSE banking index outperform the main indices. The bulls have taken a liking to the banks, with the Indian economy clocking an impressive GDP growth of more than 8% in the first quarter.

Banks are seen as a proxy to the economy, and they generally tend to do better in good times. ICICI Bank, SBI, HFC Bank, OBC, PNB and Bank of India have been the biggest winners.

Banks seem to have regained pricing power after a lull of 3-4 years. Also, their treasury portfolio has done well on the back of the improvement in government bond prices this year. As a result, most banks have reported stellar results for the first two quarters of the current fiscal year, with aggregate profits rising by 19%.

Though private banks like ICICI Bank and HDFC Bank have done better due to higher net interest margins and increased fee-based income, the public sector banks are not too far.

Banks have witnessed a huge jump in credit growth, thanks to the rapid economic expansion across sectors and regions. This has been the main driver for the rally in bank stocks. All banks have seen their yields on advances move higher, resulting in expansion of net interest margins.

Shares of ICICI Bank and other banks surged this week, pushing the 18-member BSE Bankex to a record high, after Government bonds yields dropped to six-month lows. With the credit demand pegged at 30%, the bull run in bank stocks is likely to continue for a while. The only concern would be if the RBI hikes interest rates too a much higher level.

As given in the table above, in the last two weeks, the BSE Bankex has logged double-digit gains, to be precise around 10%, compared with the 1.84% increase in the BSE Sensex and 1.14% rise in the NSE Nifty.

Over last two weeks, ICICI Bank has gained smartly, hitting a life time high of Rs925 on 16th November. The stock has rallied almost 7%. In Q2 FY07, the private sector bank posted an increase of 30% in its net profit. It has also received approval from the RBI to open new branches and ATMs.

Others like HDFC Bank, SBI and Bank of India have gained by over 6% each during the same period.