The weightage of private sector banks in the Nifty Bank index has shrunk as these stocks traded lower than last year. The shares of public sector banks, in contrast, have seen a sharp rally in this period, raising their weightage in the index.
There are multiple reasons for this differential pattern in the trade of banking stocks. Public sector banks have better access to low-cost deposits because of a much bigger base of savers and a better network. This helps them keep their cost of funds low. On the other hand, private sector lenders find it increasingly challenging to collect deposits. As a result, they have been forced to raise the deposit rates and also borrow from the wholesale market where the cost of funds are much higher. This hurts net interest margins, which is the interest earned on borrowed funds minus the interest paid for them.
This apart, the perception of public sector banks has changed because the outlook on public sector undertakings as a whole, has turned bullish.
AU Small Finance Bank’s weight fell to 1.8 percent in February 2024 from 2.4 percent in March 2022. For Axis Bank, the weight dropped from 11.6 percent in March 2022 to 10.1 percent in February 2024, while for Bandhan Bank, it went down from 1.8 percent to 1 percent. HDFC Bank, the largest private lender, saw its weight erode to 25.2 percent in February 2024 from 27.8 percent in March 2023 and 28.5 percent in March 2022. Kotak Mahindra Bank's weight in Nifty Bank declined to 9.2 percent in February from 10 percent last March and 11.4 percent in the previous comparable month.
ICICI Bank's weight in Nifty Bank, however, went up by a notch to 24.8 percent in February 2024 from 24 percent in March 2023 and 22.4 percent in March 2022. And, IDFC First Bank nearly doubled its weight to 2 percent in February 2024 from 1 percent in March 2022.
There are multiple reasons for this differential pattern in the trade of banking stocks. Public sector banks have better access to low-cost deposits because of a much bigger base of savers and a better network. This helps them keep their cost of funds low. On the other hand, private sector lenders find it increasingly challenging to collect deposits. As a result, they have been forced to raise the deposit rates and also borrow from the wholesale market where the cost of funds are much higher. This hurts net interest margins, which is the interest earned on borrowed funds minus the interest paid for them.
This apart, the perception of public sector banks has changed because the outlook on public sector undertakings as a whole, has turned bullish.
AU Small Finance Bank’s weight fell to 1.8 percent in February 2024 from 2.4 percent in March 2022. For Axis Bank, the weight dropped from 11.6 percent in March 2022 to 10.1 percent in February 2024, while for Bandhan Bank, it went down from 1.8 percent to 1 percent. HDFC Bank, the largest private lender, saw its weight erode to 25.2 percent in February 2024 from 27.8 percent in March 2023 and 28.5 percent in March 2022. Kotak Mahindra Bank's weight in Nifty Bank declined to 9.2 percent in February from 10 percent last March and 11.4 percent in the previous comparable month.
ICICI Bank's weight in Nifty Bank, however, went up by a notch to 24.8 percent in February 2024 from 24 percent in March 2023 and 22.4 percent in March 2022. And, IDFC First Bank nearly doubled its weight to 2 percent in February 2024 from 1 percent in March 2022.