Banking stocks have been under pressure of late. For the calendar so far, the Nifty Bank index is up 18 percent, compared to a 24 percent increase in the Nifty 50 index. We look at some of the reasons for this underperformance and try to answer related questions as well.
Why is the Nifty Bank index underperforming?
Most banks were trading at valuations in excess of the average for the last 10 years. What we are seeing right now is more of a time correction, meaning a correction in which prices stagnate till they revert to the mean. Already, shares of micro-finance institutions or banks with exposure to MFI business have seen a massive correction.
Are banks a good bet at current levels?
That depends on which subset of banks you are looking at –big, mid-sized or small. There is a shift of market share towards large banks, and they are relatively more stable when it comes to stressed assets, compared to mid and small banks. Yes, largecaps are a good bet at current levels. But their performance will mirror the overall mood in the market. Meaning, if market were to correct 10 percent, large banks too will be hit. Conversely, if market were to rally 10 percent, large banks will do much better than mid and small banks.
Is there a shift in investor preference towards PSU banks?
PSU banks have very low floating stock. Majority of them have massive government ownership. If you are looking to invest in PSU banks, stick to names with a lower government holding (compared to peers), and those which are well capitalized, like SBI for instance.
Why is HDFC Bank underperforming? What is worrying investors?
There has not been any significant improvement in the bank’s key operating metrics. HDFC Bank always commanded premium valuations because its growth rates in business and profitability with superior NIMs, all of which, were consistently above the industry average. That has not been the case for the last many quarters, where on most parameters, the performance has been in-line with most peers or in some cases, even lower. As a result, the premium commanded by the stock has shrunk, causing it to underperform.
ICICI Bank appears to be back in favour with investors? What is the reason?
Over the last three years, there has been a consistent improvement in key operating metrics, such as net interest income growth, net interest margin, credit growth and reduction in non performing assets. For instance, the cap between ICICI Bank and HDFC Bank’s net interest margin was 100 basis points three years back. That has now shrunk to 10 basis points as of the latest quarter.
As a proportion of the loan book, ICICI’s gross non performing assets are still much higher than that of HDFC Bank. But what investors appears to be enthused about is that the ICICI Bank’s GNPAs were close to 9 percent three years back and now they have fallen to less than 5 percent. Similar loan growth has been averaging over 15 percent for the last three quarters, after being in the range of 8-10 percent for many quarters.
What are the key triggers for the sector over the next 6-12 months?
The worst of asset quality is behind. But that is one part of the story. The best of net interest margin too is behind for the banking sector. Rates are very competitive and loan growth is hard to come by.
Corporate loan growth has started to pick up… but they aren’t much of margin accretive as banks will compete with each other in the consortium to get a large pie. Retail loan growth has largely been led by housing loans. Pent up demand in housing has been strong after the wave and this trend is expected to continue in the near term.
There will be few management changes in certain bank’s like RBL Bank, where Ahuja’s term is ending in June’22.
Credit cost has peaked out in Q1FY22/Q4FY21 for most of the banks and is expected to decline going ahead. Credit cost is the amount banks provide for stressed assets out of their operating profits. Indian banks are at their strongest ever capitalization levels in last many years. If growth picks up, banks will be among the big beneficiaries.
First Published: IST