Banking stocks set to emerge Street favourite after 3 years

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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 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 poised to hit 12,500 in the short term, market analyst Sarvendra Srivastava says.

Meanwhile, Morgan Stanley has turned bullish on private sector lenders.