Banking sector awaits privatisation and capex boost in Budget 2024

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Banking stocks, including SBI, Bank of Baroda, IDBI Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank, showed mixed performance on July 22, the day before the Budget presentation. These stocks have been active since the election results on June 4, driven by expectations of public sector bank privatisations and measures to boost private capex.

What is the banking industry seeking from this Budget?

The 2021 Budget announced the privatisation of some public sector banks (PSBs) as part of a disinvestment initiative aiming to raise Rs 1.75 trillion. This plan included IDBI Bank, two PSBs, and one general insurance company. The disinvestment process for IDBI Bank is still ongoing, and market participants are eager for updates on further equity dilution in PSBs.

Analysts at Kotak Institutional Equities argue that given the buoyant markets and demand for PSU companies in secondary markets, the government should pursue aggressive stake sales, including outright strategic sales or privatizations.

Increased allocations towards infrastructure projects such as roads, power, urban development, and railways could also boost credit offtake and improve the overall health of the banking sector, according to analysts.

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Since the election results, shares of SBI, Bank of Baroda, IDBI Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank have surged up to 15 percent, compared to a 6.7 percent rise in the Bank Nifty index.

Indian banks in excellent health

Currently, Indian banks are in excellent condition. Gross bad loans (NPAs) have dropped to a 12-year low of 2.8 percent in FY24, and net NPAs are at a historic low of 0.6 percent. Balance sheets are the strongest they have been in over a decade, and profits have rebounded sharply, quadrupling in 10 years. The return on equity (ROE) of the Indian banking sector is the highest at 15 percent since FY2011. Loan growth in the sector has increased from a decadal average of 10 percent to 15 percent over the past two years.

In the past year, shares of Axis Bank, ICICI Bank, SBI, Bank of Baroda, IDBI Bank, and Federal Bank have surged up to 58 percent, compared to a 16 percent rise in the benchmark Nifty 50 index.

If the 2024 Budget implements banking reforms, it could increase lending, mobilize deposits, and drive credit offtake, benefiting the banking sector and related stocks. The privatisation of select lenders would also aid fiscal consolidation and attract investors in the equity markets.

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