Indian Banking Stocks: Opportunities and Insights for 2024

Banking stocks make up a key component of the Indian equity markets. And right now, something quite promising seems to be brewing in the banking sector.

For instance, the SBI recently posted its highest-ever quarterly (Q4 FY2024) and fiscal year (FY2024) profit. And PSU banks taken together have seen a 4.5x increase in their net profit over the three years ending in Q4 FY2024.

Banks on the up-and-up

Such news is already encouraging, but it gets even better: there are several more factors that are currently making bank stocks quite attractive.

1. Prolonged underperformance may lead to possibility of turnaround

The Nifty Bank index tracks a basket comprising 12 key public and private bank stocks. Over the past 20-odd years, this index has typically outperformed the Nifty 50 index (in terms of its CAGR over 5-year rolling periods).

However, for the past 3 years, the Nifty Bank index has been lagging behind the Nifty 50 index1: this stretch of underperformance is the longest-ever, and is FIVE TIMES LONGER than the second-longest such stretch.

There could be some mean reversion in the near future.

2. Reasonable valuations

While Indian equities as a whole are currently being seen as overvalued, the banking sector is better placed on this front, with a price-to-book (P/B) ratio that’s relatively close to its 10-year average P/B ratio (the P/B ratio measures the extent to which a stock’s price is in line with the corresponding company’s book to its book value).

Thus, banking as a sector right now seems to offer a good entry point.

3. Healthier metrics

Banks have been posting healthy figures for various key metrics, including credit and deposit growth, return on equity, and return on assets.

In addition, rising recovery rates from defaulters have helped banks bring down their levels of NPAs (non-performing assets), with non-performing loans falling to record lows earlier this year.

The best way to invest in banks

Individual banks differ in terms of their margins, assets, NPA levels, etc., due to which their stocks also vary a fair amount in terms of performance. So if you’re willing to analyse individual stocks, you might want to invest in specific banks. However, such an approach not only demands time and expertise, it can also be more risky.

Conversely, you could invest in the cream of the banking sector by investing in a fund that tracks the above-mentioned Nifty Bank index, which effectively reflects the overall performance of the 12 most important banking stocks.

Such an approach poses a relatively lower level of risk due to diversification. In addition, the Nifty Bank index has posted excellent long-term performance. Since January 2000, the Nifty Bank index has grown 67x, while the Nifty 50 index has only grown 21x. This means a portfolio invested in the Nifty Bank index would have been 3 times larger than one which invested in the Nifty 50 index!

The Nifty Bank index also tends to deliver better returns than the Nifty 50 index for a broad range of rolling periods.

Strike while the iron is hot

We at DSP have made it very simple for you to invest in the banking sector. If you’d like to speak with an expert about this, click here. Alternatively, click the button below to get started.

1 'Nifty Bank index' refers to the Nifty Bank TRI, and 'Nifty 50 index' refers to the Nifty 50 TRI.

2The Sectors are represented by following indices: Banks - Nifty Bank, Auto - Nifty Auto, Pharma - Nifty Pharma, IT - Nifty IT, Metals - Nifty Metal, FMCG - Nifty FMCG, Energy - Nifty Energy, Realty - Nifty Realty, Infra - Nifty Infrastructure.