Stock market last week: A tale of investor enthusiasm, earnings realities, and sectoral resurgence

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Lupin, Natco Pharma, and Granules. Secondly, is to highlight the performance of PSBs and small banks in the finance sector. The PAT growth of PSU banks was robust, doubling compared to Q1 FY23.

The key triggers were strong advance growth, margin expansion, treasury gains, and low credit costs due to improved asset quality. Most PSU banks reported mid-teen loan growth YoY, with sequential growth being relatively flat due to seasonal factors. Net Interest Income broadly declined QoQ as margins witnessed compression due to the increasing cost of funds.

We anticipate this compression to persist for a few more quarters, but credit growth, which remains strong, will help mitigate the impact. Importantly, PSU Banks continued to showcase improvements in asset quality compared to the previous quarter, which will bring down credit costs. The basket of PSU Bank continues to trade below the 1x 1yr forward P/B at 0.86x, which is 30% above the 5-year average of 0.65x.

We presume the valuation is appealing on a short-term basis as PSUB continues to improve the asset quality, justifying re-rating. We hold a positive stance on State Bank of India (SBI) and Bank of Baroda (BoB) on a long-term basis. Small Finance Banks, too, witnessed a strong rally due to sustained credit demand, especially from the MSME space, business expansion, and a lower base.

However, significant margin contraction was experienced during the quarter due to deposit repricing, and this trend is expected to persist in the upcoming quarters. Although ROA remains strong due to lower provisioning on improved asset quality, margin compression and a high Cost-to-Income ratio could impact earnings growth in the near-term. However, SFBs are continuing their investments in