NIFTY Bank, NIFTY PSU Bank indices hit fresh record highs powered by SBI, Axis Bank, HDFC Bank

The measure of 12 banking stocks on the National Stock Exchange (NSE), the NIFTY Bank index, surged as much as 695 points, or 1.18%, to hit a fresh record high of 59,515, powered by gains in State Bank of India, which also climbed to its all-time high of ₹999.

Banking heavyweights such as HDFC Bank, Axis Bank, Federal Bank, IDFC First Bank, IndusInd Bank, and Canara Bank also contributed towards the surge in the NIFTY Bank index.

All 12 shares in the NIFTY Bank index were trading higher, led by Axis Bank's 1.8% gain. IndusInd Bank, IDFC First Bank, Canara Bank, and Punjab National Bank also rose between 1.2% and 1.8%.

On the BSE, a gauge of 10 banking stocks – BSE BANKEX – climbed as much as 771 points to hit a record, a new all-time high of 66,789.18.

Meanwhile, the measure of state-run lenders outperformed their NIFTY Bank peers as the NIFTY PSU Bank index advanced 179 points, or 2.11%, to an all-time high of 8,665.70.

UCO Bank was the top gainer in the NIFTY PSU Bank index; the stock surged 1.8% to ₹31. Indian Overseas Bank, Punjab National Bank, Bank of India, Union Bank of India, Bank of Baroda, and Indian Bank were also among the gainers in the PSU banking space.

Banking stocks, especially the state-run lenders, have been witnessing buying interest for quite some time now after reports suggested that the government may undertake another round of consolidation to create big banks. Better-than-anticipated earnings in the second quarter are also supporting the upward move in the banking shares.

India needs more big banks, and efforts are underway to achieve that goal, Finance Minister Nirmala Sitharaman said earlier this month.

The government in 2020 consolidated 27 banks into 12 to form larger entities. It is also considering allowing higher foreign investment in state-owned lenders, news agency Reuters reported.

Strong Q2 earnings

Private banks HDFC Bank, ICICI Bank, and Kotak Mahindra Bank posted 4%-7% growth in net interest income. Meanwhile, Axis Bank posted a modest net interest income growth of 2%.

On the other hand, the public sector banks, such as State Bank of India, Canara Bank, and Bank of Baroda, posted 2-4% YoY growth in net interest income. However, on the bottom-line front, lower provisioning led to superior profitability growth for public sector banks at 8.5% versus -0.2% YoY growth for private sector banks.

HDFC Bank and ICICI Bank posted 10.5% and 5.2% YoY net profit growth, respectively, while Axis Bank posted a 26% YoY decline in the same period. At the same time, SBI and Canara Bank reported 8-10% net profit growth. All the major public sector banks, like SBI, Canara Bank, and Bank of Baroda, posted greater than 10% credit growth during the quarter, while ICICI Bank, HDFC Bank, and Axis Bank posted credit growth in the range of 9-12%.

JPMorgan view on banks

Global investment bank JPMorgan earlier this month said it believes banks stand at a positive inflection point, with sector return on assets (RoAs) set to expand and earnings growth to accelerate over the next three years.

JPMorgan said that the second-quarter earnings mark a turning point in the return on assets (RoA) trajectory, with net interest margins (NIMs) bottoming out, and they expect an 8 bps RoA expansion for the four large private banks in the second half (vs 2QFY26) and 24 bps over the next two years (2QFY26-28).

It expects cumulative net profit growth to accelerate to a 17% CAGR over FY26-28, up from 8% in the prior two years, driven by NIM expansion and operating leverage, while asset quality trends remain benign.

JPMorgan expects the banking sector re-rating driven by RoA inflection on stabilising and expanding NIMs and accelerating loan growth as credit demand recovers.