NEW DELHI : Stocks of banking companies have become choice picks for stock market analysts, following their sterling show in the just-ended quarter, and bright prospects at a time of rising interest rates.

At a time companies in the manufacturing sector have struggled, the banking sector has stood out, cushioning India Inc.’s overall earnings performance. More than half of the incremental earnings growth during Q4FY22 was steered by stocks in the banking, financial services and insurance (BFSI) sector, thanks to a modest revival in credit growth and improvement in asset quality trends, analysts at Motilal Oswal Financial Services said.

For banks, the worst days of asset quality issues are behind and credit costs are seen coming off quite sharply. Further, much of the economic slowdown is also behind, and analysts expect to see the economy recovering, fuelling loan growth. Higher rates are also considered to be positive for banks.

Nitin Bhasin, head of research, Ambit Institutional Equities said, “Banks are our preferred bet for FY23. Valuations are relatively inexpensive, and asset quality has improved significantly, with moderation in credit cost and NPAs".

Bank Nifty has outperformed Nifty as real yields increase, analysts said. As yield hardens or inflation moderates, it can drive banks’ outperformance, said Bhasin, adding credit growth has touched double digits after 30 months. Also, as the yield curve moderates, a portion of working capital loans would shift back to banks from commercial papers, Bhasin said.

“Our view has not changed, and private banks in particular still look good to us," said Pratik Gupta, CEO and co-head of Kotak Institutional Equities.

As per analysts, the strong Q4 performance was led by lower credit costs across the sectors and improving loan growth. The tailwinds for financials remain robust, analysts said.

Among others, telecom and insurance remain preferred bets. Telcos are better placed and not impacted by an economic downturn locally, or by a global hike in rates.

Telecom remains among the defensive plays as per Kotak’s Gupta, who also likes insurance companies.

The insurance sector is expected to see growth picking up once again while the valuations have come off quite sharply for a lot of these life insurance companies, making them attractive bets.

For IT companies, analysts’ views remain mixed. The economic slowdown in US and Europe can impact the earnings of IT companies, keeping analysts cautious.

Besides Ambit’s Bhasin says that valuations are still expensive. For tier-1 companies, revenue growth is closely tied to S&P500 revenue growth. Moderation is expected in S&P500 revenue growth to 5% year-on-year in CY23 from 15% in CY21, which spells caution feels Bhasin.

Meanwhile, the opening-up of the economy after covid-led restrictions keeps multiplexes, retail, and hospitality well-placed to see earnings growth