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Banking stocks lag behind in current market rally. What is the road ahead for the sector?

YTD, Nifty Bank is up 11 percent as of June 22 closing while the Nifty50 has logged a gain of 13 percent in the same period.

June 23, 2021 / 01:46 PM IST
 
 
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The fresh rally in the Indian equity market has seen benchmarks - the Sensex and the Nifty50 - scaling fresh peaks in the last few days.

With COVID cases falling significantly and vaccination drive picking pace, the market sentiment has improved and investors seem to be anticipating faster economic growth in the coming months.

While the rally is largely broad-based as mid and small-caps are also witnessing strong gains, Nifty Bank has not seen strong gains of late. In fact, year-to-date (YTD), the banking index has shown a slight underperformance against the benchmark Nifty.

YTD, Nifty Bank is up 11 percent as of June 22 closing while the Nifty50 has logged a gain of 13 percent in the same period.

While the concerns over the asset quality of the banks in times of the pandemic persists, investors see less confident about the credit growth revival of the banks even as the government and the RBI has enforced

measures to boost liquidity in the system.

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"Despite the government and the central bank's measures to boost liquidity, the credit growth revival seems very challenging for the current fiscal year. In addition to the credit demand, asset quality is also a big concern, particularly for the PSUs," said Pranjal Kamra, CEO of Finology.

Even though the retail loan segment seems to be picking up, the corporate segment would take some more time to recover from the COVID-led demand shock, Kamra pointed out.

The coronavirus pandemic has been a serious threat to the bank's asset quality. While there was no moratorium during the second wave of COVID-19, lockdowns imposed by the state governments hit businesses which could result in NPAs for banks.

Kamra highlighted that the MSME and the real estate segments will be highly vulnerable in such an unprecedented environment, which is also reflected in the recent NPA reports of banks.

"For many big lenders, the primary focus would be around the collection and management of the unsecured portfolio rather than aggressive advanced growth and thus, a sudden recovery in credit growth cannot be expected," said Kamra.

Long-term outlook bright

Even though the banking sector has been underperforming lately, it may be a short-term phenomenon and the long-term outlook for the sector appears bright.

"I am extremely bullish on the banks and I am extremely bullish on even the so-called inefficient banks," said ace investor Rakesh Jhunjhunwala in an interview with CNBC-TV18.

"I see growth. I think we will have 14-15 percent GDP growth this year and there is going to be demand for money due to this kind of growth. I don't see less than 10-12 percent GDP growth in India for the next 4-5 years and beyond that," said Jhunjhunwala.

Bank credit grew by 5.74 percent to Rs 108.43 lakh crore and deposits rose by 9.73 percent to Rs 153.13 lakh crore in the fortnight ended June 4, 2021, a PTI report quoted RBI data.

In the previous fortnight ended May 21, 2021, bank credit had grown at 5.98 percent and deposits at 9.66 percent. In FY2020-21, bank credit had grown by 5.56 percent and deposits by 11.4 percent.

Brokerage firm Motilal Oswal Financial Services pointed out the cycle for the corporate banks now seems to be changing.

"Large banks such as SBI, ICICI Bank, and Axis Bank have undergone adverse corporate asset quality cycles, which bottomed out over FY18–19. These banks have also beefed up their balance sheets by raising capital during the pandemic and emerged stronger in FY21 with the solid performance on PPOP/earnings and asset quality," Motilal Oswal said.

They are sitting on (a) high provision coverage ratios of 70–80 percent, (b) strong capital ratios, and (c) robust balance sheets, the brokerage firm pointed out.

Motilal Oswal believes with growth picking up, the earnings momentum of corporate banks coupled with the valuation headroom can serve as twin catalysts for outperformance.

"Typically when the cycle turns, the valuation multiple of stock shifts from the lows to highs and doesn’t trade at average multiples of the cycle. This shift in valuation multiple expansion from lows to highs drives outsized gains," Motilal Oswal said.

ICICI Bank, SBI, and Axis Bank are the preferred ideas of Motilal Oswal.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Jun 23, 2021 01:41 pm

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