Market decline

Finances are attractive after the market decline, but warrant caution

While the broader indices peaked on October 19, 2021, bank stocks joined the rally about a week later – on October 25. But since its peak, foreign investors have withdrawn over ₹1 billion from the banking space. Growing global uncertainties, which could affect growth even domestically, and tight valuations have played against the sector.

As a result, the Nifty Bank index fell 16% from its October 25 high (41,192 points), with stocks such as IndusInd Bank and RBL Bank correcting 20-35%. So what has fundamentally changed?

Over the past three years, banking stocks have been among the first to lead a comeback in the broader market. Much of it was based on the hope that in the event of a widespread economic recovery, the banks would be the main beneficiaries. As January to March of each year is a period of robust growth, management commentary also tends to be bullish and in April bank stocks take center stage.

Whether in 2019 or 2020, this trend continued until September each year, after which concerns around asset quality resurfaced. Banks have gradually lost their flavor with investors.

In 2021, what added pressure were FII sales which increased from September 2021. FII sales.

From September 2020 to September 2021, bank profits (driven by an increase in other income, mainly cash gains) increased by 25-30% year-on-year. Underlying loan growth for the sector was under double digits and net interest income (or base income) was up less than 8% year over year.

Valuations over the past 12 months, meanwhile, had nearly doubled over that period, with the private bank average rising to 2.4x from 1.3x a year ago. Leading banks such as HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank had restructured 1.5-1.75% of their total books and much of the stress came from the retail space. For public sector banks, the share of the restructured portfolio was above 2.5%. Therefore, while banks were well prepared in terms of provision coverage to deal with potential asset quality issues, investors were not comfortable with the overall outlook.

Until early February this year, domestic investors were to some extent able to offset foreign investors’ sales in the banking sector. But they too seem to have taken the sidelines and made profits at every opportunity, for the same reasons cited by the FII.

After the recent correction, the sector’s futures multiples appear to have cooled. The one-year futures price (CY23) of the Nifty Bank Index is set at a seven-year low of 2.07x. Leaders such as HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank have corrected 15-20% from their October 2021 peaks and look attractive over the long term. However, March’s upcoming quarter results and management’s comments will play a decisive role in assessing the way forward for the sector, as banks have refrained from issuing positive outlooks for two quarters now.

NBFC and insurers

In FY22, growth in NBFCs (loan growth) and life insurance companies (premiums) slowed from FY19-21 levels. NBFCs struggled to match banks on interest rates. As a result, in pockets such as housing finance, mortgages and personal/vehicle loans, NBFCs average loan growth was under 10%, while banks managed 10-12% growth in during the fiscal year 21-22. For life insurers, after the initial surge in demand for post Covid protection plans in June-September 2020, demand collapsed. Much of the premium growth was driven by long-term savings products. Here too, growth has fallen from the 30-35% mark seen through fiscal 2020, leading to a nearly 30% correction in stocks listed in this space from their 2021 highs.

Main risks

Banks could be vulnerable to earnings pressure as bond yields rise

Insurers face the problem of passing on higher reinsurance costs

Growth could remain uneven for NBFCs

In equities, within NBFCs, Bajaj Finance held its valuations mainly due to its near-monopoly status, while even giants such as HDFC Limited were not spared from the market rout. Within the basket of life insurance, SBI Life, due to its ability to adjust the mix of its portfolio between protection and savings, finds the preference of investors.

Published on

March 12, 2022