The benchmark indices rallied by about 15 percent each in the year 2020 and most sectors outperformed in the year as the rally was broad-based barring S&P BSE Bankex (down 2.1%), BSE Oil & Gas (down over 4%), and Utilities (down 0.4%).
The financial sector, which was an underperformer in the year 2020, could bounce back in 2021 and that was visible in the first week of January.
The Banking and Finance sector was affected by the COVID-19 pandemic and its subsequent impact on the economy. However, selective outperformance was seen in some private banking names but the performance of public sector banks remained muted.
“The situation was much better with financial services companies as they managed to generate a positive return going by the Nifty financial services index. In 2019, Nifty financial services went up by 25.8%. As the economy rebounds, the future of the BFSI sector could improve in the months to come,” Harsh Jain, Co-founder, and COO, Groww told Moneycontrol.
The financial sector has witnessed a sharp rebound in the last two months on the back of improved collection efficiency, emerging clarity over favourable credit cost, healthy capital ratio following a series of fundraising programmes, and higher provisioning coverage ratio, etc.
“A possible improvement in the credit cycle will aid the banks to witness sound earnings growth, which might also get a boost with acceleration in asset resolution programmes under the Insolvency and Bankruptcy Code (IBC),” Reliance Securities said in a note.
Reliance Securities is of the view that several large private banks have witnessed a sharp rebound post their 2QFY21 earnings and their valuation appears to be rich, while many small private banks are still trading below their average multiples despite enjoying a healthy outlook on the earnings front.
We have collated a list from various brokerages of top picks among banking and financials for the year 2021:
Brokerage Name: Axis Securities
Ujjivan Small Finance Bank:
Ujjivan SFB (UJSFB) is a diversified SFB that transitioned from an NBFC in Feb’17. The bank primarily caters to the low and middle-income individuals and businesses in the metro and urban areas that have limited or no access to formal banking and finance channels.
UJSFB’s efforts to de-risk the portfolio and move away from MFI towards the SME and Affordable housing space and other newly introduced products such as vehicle and gold finance offer the bank ample headroom to grow.
“We expect the book to grow at 23% CAGR over FY20-23E driven by a strong growth of 44% CAGR in non-microfinance segments, albeit on a smaller base,” said the note.
The brokerage firm believes that the fast-paced diversification from a micro financier to a small finance bank and the recent ramp up in the liability franchise after a slow start augur well for the bank.
ICICI Bank (ICICIBC) is amongst the largest private sector bank in India with business operations spread across Retail, Corporate, and Insurance etc. It is supported by a strong liability franchise and healthy retail corporate mix.
Its subsidiaries ICICI Venture Funds, ICICI Pru AMC, ICICI Securities, ICICI Prudential, and ICICI Lombard are amongst the leading companies in their respective segments.
The bank expects the corporate restructuring book to be ~1% of loans and credit costs to normalise in FY22. The recent capital raise has improved Tier I to 17.9% which provides an adequate balance sheet buffer.
"We believe valuations are undemanding for the stock given strong liability franchise and leveraging opportunities across group products," said the note.
Manappuram Finance (MGFL) is amongst the leading gold loan NBFCs in India and is well diversified into other business segments like housing loan, vehicle loan, and microfinance, with a branch network size of around 4,623 spread across the country.
“We believe that credit costs will remain high on asset quality concerns for the non-gold business. We expect cost optimization to aid profitability. Balance sheet liquidity remains comfortable with no funding challenges,” said the note.
While cautious on the non-gold business, we believe the gold business will support overall performance in uncertain macro conditions. The brokerage firm expects MGFL to maintain ROAE of ~24% over FY21/FY22. Gold lending is a high moat business and specialists like MGFL will continue to benefit.
Can Fin Homes:
CAN FIN HOMES (CANF) is a 33year old retail-focused housing finance company, promoted by Canara Bank (30% stake). It is focused largely in Tier II/III cities with 90% of loan books for housing and the rest for non-housing.
While loan growth moderation is expected along-with slight asset quality deterioration on account of Covid-19, we expect the company to recover faster than its peers due to its loan mix and negligible developer exposure.
Lower cost of funds should aid the company in maintaining NIMs while the loan mix profile skewed towards salaried segment will help in maintaining asset quality.
“We expect lower provisions and built-in improved NIM for FY21E. We remain positive on the stock given its loan book profile, stable liquidity position, and robust CAR (25%) and maintain buy,” said the note.Federal Bank:
Federal Bank is a Kerala-based private sector bank. It has exposure to insurance and NBFC business through its joint venture with IDBI and wholly-owned subsidiary Fedfina respectively.
The bank has been proactively managing its strategy from being a regional player towards being a branch light distribution heavy franchise with a push towards digital banking.
Given strong underwriting standards, changing loan mix, and strong retail deposit franchise, we expect the valuation to improve from current levels. FB has been taking a cautious approach in building the loan mix toward high-rated corporates and retail loans.
The bank’s liability franchise remains strong with CASA plus Retail TD of ~90% and one of the highest LCR amongst banks. While Q3FY21 could witness hiccups in asset quality, we expect higher provisioning should hold fort. Recent asset quality trends indicate lower than expected slippages in the coming quarters.
Brokerage Firm: Angel Broking
Bandhan Bank has a strong deposit base & low cost of funds coupled with diversification away from West Bangal and MFI along with stable NIM's and RoE's will lead to a retaing for the bank.
IDFC First Bank:
Angel Broking is of the view that efforts to build retail liability franchise, fresh capital infusion, and provision taken on the wholesale book will help to tide over this difficult time.
Brokerage Firm: IIFL Securities
Aavas Financiers (Aavas), a retail HFC has carved out a niche for itself in affordable housing finance by focusing on self-employed non-professionals that lack adequate income documentation and hence are underserved.
Aavas is adequately capitalized, has a strong liquidity profile, and has a diversified funding mix which has a lower cost of funds on account of its high credit rating. The cost of funds is likely to remain low on account of an increasing share of NHB refinancing.
"We expect the cost to income to decline going ahead as operating leverage kicks in. We expect Aavas to post loan growth of ~25% CAGR over FY20-22E and expect ROA and ROE to sustain at current levels," said the note.Disclaimer
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