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Last Updated : May 26, 2020 11:01 AM IST | Source: Moneycontrol.com

Pain likely to exacerbate for banks, financials; should you avoid the sector?

Nifty Bank index plunged 2.6 percent on May 22. As many as 9 out of a total of 12 stocks ended in the red, with Axis Bank, Federal Bank, RBL Bank, ICICI Bank and Bandhan Bank as the top losers.

Most bank and financial stocks suffered strong losses on May 22 after RBI Governor Shaktikanta Das announced an extension of loan moratorium by three months.

The deadline for the earlier moratorium was May 31. Governor Das had announced a three-month moratorium for all term loan repayments between March 1 and May 31 at his last address in April.

The loan moratorium will be extended till August 31, says RBI governor Shaktikanta Das. This makes it a six-month moratorium. He added that the lending institutions are being permitted to restore the margins for working capital to the origin level by March 31, 2021.

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RBI's announcement spooked investors who sensed that the banks and NBFC stocks may see tougher days ahead and restructuring of loans would have been a relief for them.

As many as 39 financial stocks hit their 52-week low on BSE on May 22 after the RBI's announcement, out of which 10 stocks have market capitalisation of more than Rs 1,000 crore.

Banks funds

Rough road ahead?

Banks are expected to face a tough time given the nationwide lockdown and the extension in the moratorium, Umesh Mehta, Head of Research, Samco Securities, said in an interview with Moneycontrol.

"The extension of the moratorium will bring about a fresh bout of NPA cycle if not from this quarter then sometime down the line. This will affect the banks’ balance sheets and in turn, their profitability. Hence, even though the RBI took a calibrated approach to save the economy, it did not favour the banks which led to the negative impact. The negative growth rate just added to the woes," Mehta said.

The RBI’s decision to extend the moratorium to August 31 could turn out to be a major negative for non-banking financial companies (NBFCs), Emkay Global has said in a note.

“We read this as major negative for all NBFCs (including the ones with strong liability franchises), as this would further delay the overall collection and recovery procedure, and stretch the total liquidity cycle for all. In addition, this would further damage financial discipline, especially for small-ticket borrowers and MFIs,” the note added.

The note highlighted that there was no clarity yet over the moratorium extension for NBFCs from banks. “Most of the large NBFCs stayed away from opting for a moratorium; however, we think they also need to change stance over this. Hence, confusion multiplies now,” it said.

Deepthi Mathew- Economist- Geojit Financial Services is of the view that the risk-averseness of banks needs to be removed as there is substantial liquidity in the banking sector. She said while the extension of the moratorium would bring in some relief to the borrowers, but it can put pressure on the bank's balance sheet.

What should investors do?

Nifty Bank index plunged 2.6 percent on May 22. As many as 9 out of a total of 12 stocks ended in the red, with Axis Bank, Federal Bank, RBL Bank, ICICI Bank and Bandhan Bank as the top losers.

The Nifty Financial Service index fell 3.06 percent, with 17 stocks in the red and 3 in the green. Mahindra & Mahindra Financial Services, Shriram Transport Finance Company and Power Finance Corporation settled as the top losers in the index, falling up to 6 percent.

As the banking sector is likely to remain under pressure in the near-term due to a high correlation with the economy, experts are advising to new customers to look at companies that have stable asset quality.

"For new investors, we only recommend investing in those banks which have stable assets quality, well-capitalized, balance sheet strength to bear possible COVID-19 related losses and strong liability franchise," said Sundar Sanmukhani, Head of Fundamental Research at Choice Broking.

"Investors with medium to long term horizon can invest in ICICI Bank, HDFC Bank and Axis Bank. These are top private sector banks with strong fundamentals and also available at a multi-year low valuation," Sanmukhani added.

Arun Kumar, Market Strategist at Reliance Securities expects volatility to prevail and advises investors to select the leaders as they offer both liquidity and relatively lower volatility.

On the other hand, Mehta of Samco Securities advises investors to avoid banking stocks.

"It would be safer for investors to avoid banking stocks for the moment at least until the pain has been completely discounted in their books. Investing in banks just because valuations are cheaper would be an incorrect strategy because if there is minimal to negative growth then the investment bet will not turn out to be successful," Mehta said.

"As for investors having a bank heavy portfolio, they should try to diversify by investing in fundamentally strong companies from other sectors to safeguard themselves from acute losses," he added.

In order to minimise the risk, Hemang Kapasi, Portfolio Manager – Equity Investment Products, Sanctum Wealth Management advises investors to diversify the portfolio.

"Investors should diversify within the financial sector to some non-lending financial names like insurance business, asset management companies as these businesses are less impacted than the lending businesses and would bounce back quicker than the lending financials as these businesses are under-penetrated and the long term story remains intact," Kapasi said.

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.
First Published on May 26, 2020 11:01 am
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