Indian state banks' stocks shine in Q3 total returns as East Asia peers falter

India's state-owned lenders were the best-performing bank stocks among peers in the Asia-Pacific region in the quarter ended Sept. 30, reflecting growing investor interest and stronger financials metrics.

Indian Overseas Bank's total returns rose 91.60% in the quarter, placing it at the top of 15 Asia-Pacific banks by total returns, while Central Bank of India was in the second spot with a rise of 76.59%, according to data compiled by S&P Global Market Intelligence. Indian state-owned banks occupied 10 of the top 15 slots in the list the region's banks by total returns, dominating the rankings for the second straight quarter.

Indonesia's PT Bank Nationalnobu Tbk ranked third, with total returns up 74.80% in the July-to-September quarter. Two Japanese banks and one each from Pakistan and Sri Lanka filled the remaining slots.

"India Inc. will offer a rich hunting ground for international investors looking to diversify their holdings," Prashant Kothari, senior investment manager on Pictet Asset Management's emerging equities team, said in an Oct. 4 note to investors. "Indian equities received substantial foreign inflows in 2023, with the market attracting net USD16 billion so far this year — representing more than half of total net inflows into global stocks."

Record high

India's stock market hit an all-time high valuation of $3.8 trillion in September, while Indian equities have outpaced their counterparts in emerging markets for some time, Kothari said.

The Nifty 50 and BSE Sensex have risen 11.06% and 9.69%, respectively, in the past six months, while the Nifty Bank index gained 7.73%.

Indian banks have gained significantly in recent years from high loan growth and improved margins in a fast-growing economy, making them attractive for both domestic and foreign investors. Bank credit in India has seen solid growth in recent months, with Jefferies analysts projecting it to stabilize around 13% to 14% in the short-term, according to an Oct. 1 note. The country's economy is expected to expand 6% to 7% annually until 2026 at least, making it the fastest-growing major global economy, according to S&P Global Ratings.

The country's state-owned banks' stock performance could be attributed to a "massive clean-up of their balance sheets" and their lower valuations, said Sandeep Upadhyay, managing director of infrastructure practice at Centrum Capital Ltd. In addition to the significant improvement in asset quality, some large public sector banks have seen a 2.5-3x correction in their market capitalization since COVID-19, "with still enough scope of improvement in their future prospects," Upadhyay said.

Worst performers

Ten banks from East Asia ranked among the 15 worst-performing Asia-Pacific bank stocks by total returns, with the remaining slots taken by three banks from Indonesia and one each from the Philippines and Vietnam, Market Intelligence data shows. Returns of Indonesia's PT Bank Jago Tbk and PT Bank Neo Commerce Tbk dropped 37.65% and 34.87%, respectively, in the quarter.

Seven banks in mainland China featured in the list, which was broadly in line with the performance of the stock markets there, where the Shanghai stock exchange's SSE Composite Index fell nearly 3% and the Hang Seng Mainland Banks Index fell 11% in the third quarter.

Mainland Chinese stocks experienced sharp declines in August, largely due to the poor performance of the country’s property sector, London-based asset manager Schroders said in an Oct. 4 quarterly markets review. The country has moved to boost confidence in its stock market by cutting stamp duty levied on share transactions and slowing the pace of IPOs in Shanghai and Shenzhen, but this could draw liquidity away from the wider market and weigh on share prices, Schroders added.