Over the past several years the return on assets (RoA) of banks has increased sharply. From being in the negative zone in 2018 and 2019, the RoA of banks has risen rapidly to 1.2 per cent for the first half of FY24, according to the RBI.
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As an economy, India has been on the ascent over the past few years even though global growth has been slow. When a country’s gross domestic product (GDP) is on a robust growth path, a great way to play the theme of economic expansion would be to invest in the banking sector. It is indeed a proxy to the growth story of a country as credit growth fuels the economic expansionary cycle.
As the primary vehicle for giving out loans, collecting deposits and driving financial inclusion, banks play a major role in a country’s financialisation and also reap the gains as beneficiaries. With rapid digitisation of payments, deeper penetration of internet banking and innovative financial products banks presently offer great opportunities for investors.
Over the last year, listed banking names have been under pressure leading to the banking sector’s underperformance owing to relatively higher interest rates. However, a healthy reduction in non-performing assets and steady credit growth have been positives for the segment, with the digital infrastructure becoming the fulcrum for financial penetration.
Bankable sector
When we take nominal GDP growth (which includes inflation), India has grown at a rate of 12.1 per cent from FY08 to FY23, according to Centre for Monitoring Indian Economy (CMIE) data. Interestingly, bank credit (non-food) has risen at a compounded annual rate of 12.6 per cent over the same period, indicating a strong linkage to the economic prospects of the country.
As of December 2023, Indian banks control nearly $2.7 trillion in assets. Over the past several years the return on assets (RoA) of banks has increased sharply. From being in the negative zone in 2018 and 2019, the RoA of banks has risen rapidly to 1.2 per cent for the first half of FY24, according to the RBI.
The non-performing assets (NPAs) scenario has improved vastly for banks. From a net NPA ratio of as high as 6 per cent as of March 2018, the figure for banks has come down in a robust manner over the years to 0.7 per cent as of December 2023, according to a Care Edge report. A strong focus on collections, overall improvement in asset quality, write-offs and resolutions via the insolvency and bankruptcy code (IBC) have helped banks in strengthening their loan books.
Retail credit has more than doubled between FY18 to FY23, from Rs 19.08 lakh crore to Rs 40.85 lakh crore according to the RBI.
UPI transactions have just ended FY24 with a little under Rs 200 lakh crore in transactions.
These are but a few factors that point towards the healthy prospects for the banking sector. One of the ways in which an investor can participate or tap into the growth journey of the Indian banking system is through a broad based index like the Nifty Bank index.
Investing in the Nifty Bank index
Investors have the option of choosing between opting for a Nifty Bank index via the ETF or the index fund route. The Nifty Bank Index consists of highly liquid and large-capitalised Indian banking stocks. It serves as a benchmark for investors and market intermediaries, reflecting the capital market performance of Indian banks. The index gives investors access to 12 of the biggest public, private and small finance banks in the country.
Now, in terms of valuations, the Bank Nifty is currently cheaper than the Nifty 50 on parameters such as the Price Earnings multiple (PE) and price to book ratio (PB), thus presenting an attractive entry point.
In the last 15 calendar years from 2009 to 2023, the Bank Nifty has delivered positive returns. A dull year is usually followed by a robust performance over the next few years. When rolling returns are taken for the Nifty and the Bank Nifty, the latter has given better mean returns.
On both 3-year and 5-year rolling returns basis from April 2014 to April 2024, the Bank Nifty TRI has outperformed the Nifty 50 TRI.
So, if you are an investor looking for avenues to play the India growth story, a banking sector based index fund or an ETF can be a good starting point as banks are considered to be the backbone of an economy. Basis an investor’s portfolio requirement, such an offering can be considered as a part of one’s core or tactical allocation. To understand the product fit better, it is best to consult a registered investment advisor.
(The writer is Principal- Investment Strategy, ICICI Prudential AMC)