After recent drubbing, here’s how you could trade your banking, NBFC stocks

So, why do banks look better? Moneycontrol tries to answer this question, as told by experts.

Valuation

Nitin Aggarwal of Motilal Oswal Financial Services believes several private banks are now trading below their average levels of valuation.

“Over the medium term, we expect the banking sector to recover gradually as fresh slippages subsides while lagged re-pricing of advances portfolio aids margin recovery,” Aggarwal, vice president — institutional research and banking analyst, Motilal Oswal Financial Services told Moneycontrol.

Migration to banking names

With NBFCs facing a tight crunch, banks stand to benefit as they could see customers migrating to bigger banking names. Additionally, an improved trend in bond yields and no repo rate hike by the Reserve Bank of India (RBI) is an added feather.

“So, this development is good for PSU banks. Also, corporate-facing banks are looking attractive too as asset quality and top management issues at such banks are resolving. Private, retail-focused banks have faced issues in the past two months or so. Having said that, stocks such as IndusInd Bank could perform well in the mid- to long-term. We have a target price of Rs 2,248 on the stock,” Siddharth Sedani, Vice President — Equity Advisory, Anand Rathi Shares and Stock Brokers said.

Provisioning and asset quality

Large corporate banks could perform better in the long-term, according to Motilal Oswal, as their asset quality issues have been in the last phase of resolution, while higher provisioning coverage on NCLT-list 2 will obviate the need of further provisioning.

“The leadership issues at two of the large corporate banks were resolved in this quarter and would be seen as a positive. Within PSU banks, SBI remains the best pick and we expect sharp earnings recovery over FY19-21E led by improvement in loan growth, margins and credit cost,” Aggarwal told Moneycontrol.

But what happens to an investor who is invested in the NBFC space?

NBFCs were grappling with tight liquidity and are now resorting to tightening how they lend, in the aftermath of the IL&FS credit defaults. In such conditions, NBFCs’ growth prospects are likely to remain under pressure.

Here’s what you could do.

Look for quality names

Well-rated and well-managed NBFCs will be in a position to recover from the liquidity issues (if any) quickly as compared to other NBFCs. NBFCs will face margin pressure in the near term due to a rise in the cost of funds. NBFCs who are in a position to pass on the rise in the cost of funds to the customers will be better positioned, Aggarwal said.

“Investors should hold on to larger and better-rated NBFCs as once the things settle down those names will recover faster supported by earnings growth and within banks, large corporate banks should be looked at,” Aggarwal further said.

Be cautious

Emkay Global Financial Services has a cautious stance on NBFCs. “We maintain our cautious stance on NBFCs. Our preference stays with lenders that are endowed with better ALM (asset liability management), as the rising yield scenario sustains, we anticipate fortunes of the lenders with better ALM profiles to improve," Dhananjay Sinha, Head, Institutional Research, Economist and Strategist, at Emkay Global Financial Services told Moneycontrol.

Be watchful of HFCs

Among the NBFCs, one could definitely stay away from housing finance companies (HFCs) and look at the ones whose tenures are for the short term.

“For instance, look at Mahindra Financial. They have a vehicle financing business, where the tenure is 3, 5 or 7 years and not long term like in case of housing finance. They also stand to benefit from the government’s thrust on rural improvement and increase in minimum support price (MSP).

Event triggers

Lastly, Srivastava believes events such as mergers and acquisitions or even banking licenses could be the next big triggers.

“Wait with NBFCs as the triggers might give you a decent rate of returns compared to getting out now and getting into banks,” he told CNBC-TV18.