Banking stocks at crossroads

The performance of the banking sector is closely tied to that of the economy. With the economy on the upswing once again, analysts expect the banking sector to do well over the medium term. Investors must bear in mind that this is a cyclical sector. During the bear phase of 2008-09, the Sensex fell by 61 per cent. During that phase the BSE Bankex declined by 70 per cent. When the markets rebounded (the bull rally lasted from March 9, 2009 to June 23, 2010), the BSE Bankex gained 203 per cent compared to the Sensex's gain of 118 per cent, thereby compensating investors more than adequately for their earlier loss. In the last one month (May 23, 2009 to June 23, 2010), BSE Bankex has given returns of 6.69 per cent compared to the Sensex's 7.81 per cent. The best-performing index during this period, BSE Auto, gave a return of 12.82 per cent. Positive drivers of earnings As the economy turns around (the high Q4FY10 GDP number and the IIP number for April attest to this), it is expected that credit disbursement will increase, which in turn will enable banks to improve their core earnings. According to Vaibhav Agrawal, vice-president, research and banking, Angel Broking, “Cyclically, the sector is headed for an upturn, with credit growth estimated to increase to 20 per cent year-on-year in FY2011E (a conservative 2.4 times estimated GDP growth).” He expects credit demand from the private sect