Banking Stocks Retreat Amid Market Volatility After Early Gains

Banking stocks cooled off from earlier highs, reflecting volatility in benchmark indices, after a near two percent upmove backed by earnings cheer.

The Bank Nifty index rose by 2 percent to over 52,300 on July 29, driven by earnings-led gains in key banks like Bandhan Bank, PNB, IndusInd Bank, and ICICI Bank. Major brokerages upgraded their recommendations on banking shares, predicting further re-rating.

ICICI Bank Leads the Rally

ICICI Bank, holding a 20.59 percent weightage in the Bank Nifty index, saw a rise of over 2 percent during trade after reporting a 14.6 percent year-on-year (YoY) increase in net profit and a 7.4 percent YoY rise in net interest income (NII) for Q1FY25. Macquarie, Morgan Stanley, Nuvama Institutional Equities, and InCredit Equities have maintained a bullish view on ICICI Bank, setting higher target prices.

Strong Performances by PNB and Bandhan Bank

PNB and Bandhan Bank, with 3.2 percent and 0.7 percent weightage in the Bank Nifty index respectively, surged up to 11 percent during trade. PNB's net profit soared 159 percent YoY to a record Rs 3,251 crore, while Bandhan Bank's profit increased by 47.5 percent YoY to Rs 721 crore for the quarter ended June.

Outlook and Challenges

While banking companies have reported strong topline growth for Q1FY25, they continue to face margin pressures due to higher funding costs. Lenders anticipate a gradual easing of margin squeeze in the coming quarters as prospects of a rate cut rise. However, concerns over high loan-to-deposit ratios (LDR) remain, as deposit mobilisation lags behind loan growth.

Overall, the robust earnings report has driven a positive sentiment among investors, despite the sector grappling with challenges related to funding costs and LDR. The outlook for the banking sector remains cautiously optimistic as the market adjusts to evolving economic conditions.