Banking stocks set to emerge Street favourite after 3 years

The BSE Sensex is trading near record highs after scaling the key 22,000 peak, while the broader Nifty is trading above 6,550 levels. The strong up move in stock markets have come despite a selloff in hitherto favourites -- IT and pharma stocks. The latest rally in markets has been fuelled by banking stocks, which have jumped nearly 12 per cent over the last five days as against a 4 per cent rise in the broader Nifty. This is the second successive month of gains for the Bank Nifty, which lagged the Sensex by 10 per cent in the past 12 and 36 months. Profitability of Indian lenders has been under pressure for the last three years as stressed assets rose and economic growth slowed to a decade-low. "In 2009-2010, nominal GDP growth (growth plus inflation) was running well ahead of interest rates, so corporate revenue growth was well ahead of interest rates, which enabled them to lever up more. However, over the last three years GDP growth kept decelerating while rates remained elevated. This caused widespread stress among corporate borrowers and consequently pickup in bad loans," Morgan Stanley says. Things might be changing now. The outperformance in banking stocks could provide fresh legs to the market rally because financial services have the biggest weightage (26 per cent) on the Nifty. In other words, the banking sector is the most influential sector on the Nifty and if it starts outperforming, the Nifty is bound to rise at a faster pace. The Bank Nifty has broken above the key 12,000 levels and it is poise to hit 12,500 in the short term, market analyst Sarvendra Srivastava says. Meanwhile, Morgan Stanley has turned bullish on private sector lenders. Here's are the reasons why the global investment bank expects private lenders to rally, 1) India's GDP growth is likely to improve from 4.7 per cent in 2013-14 to 5.2 per cent in 2014-15 and 6.2 per cent in 2015-16, Morgan Stanley estimates. Improving growth is likely to translate into increased lending and will drive banking stocks. 2) Narrowing of current account deficit from a record 6 per cent to around 1 per cent of GDP has reduced the probability of a currency shock like the one seen last year. As CAD improves, attractiveness of India goes up, thereby helping get more flows. This in turn can help liquidity situation further, Morgan Stanley says. 3) Retail or CPI inflation, currently nearly 9 per cent, is improving. In the next fiscal (2014-15), base effect will also likely come in play helping improve CPI further, Morgan Stanley says. This in turn will help banks reduce deposit rates. Real deposit rates have turned positive for the first time in five years, Morgan Stanley notes. 4) Banking system liquidity is much better than it has been in the last three years. The current loan deposit ratio at 77 per cent (versus peak of 78.3 per cent) means banks have larger liquidity to cover any unforeseen requirements. Besides, 12-month incremental credit deposit ratio has eased to 70 per cent (versus peak of 102 per cent) indicating decreasing reliance on core deposits for lending, Morgan Stanley says. 5) Stressed loans (bad or restructured) in India total $100 billion, or about 10 per cent of all loans, but the sector is moving towards the end of bad loan cycle. In addition, corporate margin deterioration has stabilized. However, state-run banks with bad loan ratio of about 4.5 per cent (which is more than double that for private sector lenders), will continue to remain under pressure, Morgan Stanley says. The investment bank remains overweight on HDFC Bank, HDFC, ICICI Bank, and Axis Bank. It has upgraded IndusInd, Yes, M&M Finance, ING Vysya and Shriram Transport to overweight. It also upgraded Bank of Baroda and Kotak Bank to equal weight. However, it maintains underweight ratings on all other PSU lenders. Source :  http://profit.ndtv.com/news/market/article-banking-stocks-set-to-emerge-street-favourite-after-3-years-382664