Growth recovery crucial for banking stocks to rebound, says Axis MF's Ashish Gupta

Ashish Gupta, Chief Investment Officer at Axis MF.

Banking stocks have remained in favour with investors over the last few years, despite their continued underperformance relative to the benchmark Nifty 50. However, that hasn't deterred hopes of a potential outperformance from the banking pack, which holds the largest weightage in the benchmark index.

Ashish Gupta, Chief Investment Officer at Axis MF, believes that for banks to rebound, a strong recovery in growth is essential. "Banks need to grow at a rate higher than nominal GDP, ideally 1.5 times nominal GDP, both in terms of top-line growth and earnings," he said. However, Gupta sees little chance of this materializing in FY25, primarily due to profitability sitting at a cyclical high and rising credit costs from historically low levels.

That said, he still sees a silver lining of hope hinging on the Reserve Bank of India. He believes that robust monetary actions could drive deposit growth across the system, reigniting interest in banks.

Reflecting on the challenges faced by banking stocks over the last few years, Gupta explained that the sector’s transition from a growth to a value sector is typical during periods of de-rating. "Banks, especially private ones, were once seen as growth stocks, outpacing GDP growth by 1.5 to 2 times. Private banks used to grow loans by 20-25 percent and earnings by 18-20 percent. This dynamic has shifted for several reasons," he noted.

Highlighting the growth slowdown in India's largest bank-HDFC Bank, which had consistently grown at a rate of 20 percent for the last three decades, Gupta pointed out a sharp deceleration to just 3 percent. He warned that this growth slowdown would erode past valuation multiples unless a recovery takes shape.

Gupta also pointed several factors that have contributed to this shift, such as changes in the balance sheet construct and deposit growth in the system.

The Bank Nifty has underperformed the Nifty 50, falling 3.3 percent year-to-date, compared to the Nifty 50’s 1.5 percent drop. This trend has persisted over the past year, two years, and even three years, with the Bank Nifty consistently lagging the broader market on all these timeframes.

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