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

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The fresh rally within the Indian equity market has seen benchmarks – the Sensex and therefore the Nifty50 – scaling fresh peaks within the previous couple of days.

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

While the rally is essentially broad-based as mid and small-caps also are witnessing strong gains, Nifty Bank has not seen strong gains lately . In fact, year-to-date (YTD), the banking index has shown a small 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 within 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 whilst the govt and therefore the RBI has enforced
measures to spice up liquidity within the system.

“Despite the govt and therefore the central bank’s measures to spice up liquidity, the credit growth revival seems very challenging for the present financial year . additionally to the credit demand, asset quality is additionally an enormous concern, particularly for the PSUs,” said Pranjal Kamra, CEO of Finology.

Even though the retail loan segment seems to be learning , the company segment would take some longer to get over the COVID-led demand shock, Kamra acknowledged .

The coronavirus pandemic has been a significant 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 end in NPAs for banks.

Kamra highlighted that the MSME and therefore the land segments are going to be highly vulnerable in such an unprecedented environment, which is additionally reflected within the recent NPA reports of banks.

“For many big lenders, the first focus would be round the collection and management of the unsecured portfolio instead of aggressive advanced growth and thus, a sudden recovery in credit growth can’t be expected,” said Kamra.

Long-term outlook bright

Even though the banking sector has been underperforming lately, it’s going to be a short-term phenomenon and therefore the long-term outlook for the world appears bright.

“I am extremely bullish on the banks and that 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 feel getting to “> we’ll have 14-15 percent GDP growth this year and there’s going to be demand for money thanks to this type of growth. i do not see but 10-12 percent GDP growth in India for subsequent 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 within 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 acknowledged the cycle for the company banks now seems to be changing.

“Large banks like 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 acknowledged .

Motilal Oswal believes with growth learning , the earnings momentum of corporate banks including the valuation headroom can function 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 well-liked ideas of Motilal Oswal.