Indian bank stocks' record rally to continue as balance sheets strengthen

By Nupur Anand

MUMBAI (Reuters) - Stocks of Indian lenders have rallied this year to touch a record high on Wednesday and analysts believe the party is likely to continue as banks issued robust earnings reports for the latest quarter.

The Nifty public sector bank index has jumped about 50% so far this year and the bank index has risen roughly 17%, handily outperforming the benchmark Nifty 50 index's approximately 4% gain.

This comes at a time when credit growth is at a multi-year high and bad loans across lenders have reduced significantly.

"A well-capitalised balance sheet, improving loan growth and lower credit cost forecasts are positive catalysts that should allow valuation multiples to improve as macro stability returns," Nomura analysts said in a report earlier this week.

The brokerage said private and state-owned lenders that remained better placed to grow include ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, IndusInd Bank Ltd, Bank of Baroda Ltd and State Bank of India (SBI).

GRAPHIC: Indian banks' stocks rise after robust earnings (https://graphics.reuters.com/INDIA-BANKS/egpbynrqrvq/chart.png)

"The rise in banks' stock is expected to continue for now as all banks have seen an uptick in loan growth and net interest margins have also improved," said Asutosh Mishra, an analyst at Ashika Stock Broking.

Credit growth is at a multi-year high, with an uptick both in retail and corporate loans.

Indian banks saw a 17.9% year-on-year jump in credit growth for the fortnight through Oct. 21, central bank data showed, and market participants expect growth to accelerate in the coming months.

Still, Mishra sounded a note of caution.

"One key concern going ahead remains how the rising interest rate scenario will impact credit growth."

GRAPHIC: Indian banks' loan growth rises (https://graphics.reuters.com/INDIA-BANK/mypmomzqgpr/chart.png)

While most lenders have revised their credit-growth targets upwards, deposits have been growing at below 10%, according to central bank data.

The deposit growth rate remains a "nagging concern," brokerage Macquarie said.

Some like SBI, the country's largest lender, are looking at unwinding their treasury investments to boost deposit growth, while smaller lenders, such as Yes Bank Ltd and RBL Bank Ltd, are relying on digital channels.

Another bright spot for Indian lenders is the improving asset quality, Macquarie noted.

"The debit bounce rates are at the lowest level in the past four years indicating very strong asset quality outcomes as reflected in the credit costs of banks reporting this quarter."

(Reporting by Nupur Anand; Editing by Savio D'Souza)