Vault Matters | Will the zing factor make a comeback in bank stocks?

bank stock

The New Year hasn’t turned out to be a very pleasant one, either for the broader markets or banking stocks in particular. While the bellwether Nifty index is down by about 2% year-to-date, the Nifty Bank index has fallen over 4%. Even on a six-month or one-year basis, the Nifty Bank index is an underperformer compared to the broader markets.

Stagnation in the Banking Sector

One could say the reason for this is the pain in unsecured loans, which is now becoming apparent. While this is valid, it is also crucial to note that there is nothing particularly enthusiastic happening in the banking sector right now that differentiates one bank from another, or makes a case for one to be valued more highly than its peers. In simple terms, the "zing" factor is now missing in the banking sector. The last time there was interest in banking stocks was between 2016 and 2022, largely due to a few banks performing better in terms of asset quality or growth.

There was something that set a few banks apart from the rest, but that is no longer the case. This was the reason why banks like HDFC and Kotak were trading at 4–4.5x price-to-book multiples, well ahead of the competition, until about 2022. Today, that’s no longer the case. The core valuations of Kotak Mahindra Bank and HDFC Bank are now at 2x price-to-book, while many smaller peers trade anywhere between 1.3x and 1.8x price-to-book. Some trade below book value.

Growth Concerns Weigh on Bank Valuations

For almost two years, asset quality has barely been a problem for the industry. In fact, gross non-performing assets for the industry are now at a decadal low of around 3%. Clearly, the ability to outperform another bank on asset quality alone is not going to win investors over. The same is true for growth. The days of 20% plus growth that any bank could post on a balance sheet now seem distant, as everyone is scrambling for deposits and, consequently, taking a hit on loan growth. Hence, whatever we see today is what investors will have to contend with. With the earlier triggers for a re-rating in the sector barely holding up as valid reasons to entice investors, the industry needs fresh triggers for another round of re-rating in valuations.

Will it be the ability of banks to create differentiated products or position their businesses as an annual play or margin play? We don’t know yet. But unless a new theme or idea emerges that can be proven credible and sustainable in the eyes of investors, the reasons for renewed interest in the banking sector don’t seem imminent.