In the event of substantial selling pressure, especially in midcap and smallcap stocks, one can contemplate buying large-cap banking or finance stocks, which could minimize downside risks, according to analysts. Both the Nifty Bank and Nifty Financial Services indices have underperformed the broader Nifty index in six months. Stocks such as HDFC Bank, Kotak Bank, SBI, and SBI Cards have also yielded lower returns than the benchmark index.
Analysts believe the banking and financial services sector will spearhead the next marksurge in the medium to long term, buoyed by India’s economic expansion driven by capital expenditure, burgeoning credit activity, and an upswing in consumer spending.
“Banking is one sector that has underperformed the broader markets in the last couple of months,” said Devang Mehta, director – of equity advisory at Spark Private Wealth. “A lot of private banks, PSU banks, certain NBFCs, consumer finance companies could probably do well, give and take 5% correction here or there, but most of these banks should be good proxy play candidates to play the economic growth.”
The Nifty Bank index gained 12.41% in the last six months while the Nifty Financial Services index rose 13% compared to Nifty’s 15% rally, during this period.
HDFC Bank, a significant index heavyweight, has generated a mere 3% return in six months. Currently, it trades at a book value of 1.08 times its one-year forward earnings, which starkly contrasts its five-year average of 2.59.
Similarly, Kotak Mahindra Bank has experienced a 6.65% uptick in the same six-month period. It is trading at a one-year forward book value of 2.91, compared to its five-year average of 2.94. Even India’s largest public sector lender has shown a gain of 7.3% in the past six months.
“Large-cap banking stocks are still available at reasonable valuations, but we would like to be stock-specific,” said Rahul Malani, Deputy VP – Research, Sharekhan. “We believe SBI would likely give market returns in the next 12 months, whereas the overall outlook for Kotak Bank remains solid. Here, the street is just waiting for management transition, which is expected to be out in the coming days.”
He added that HDFC bank would consolidate in the next 12 months as liability side transition happens, restricting the loan growth to low mid-teens.
In 2018, the banking system’s non-performing assets (NPAs) collectively stood at approximately 11%. As of now, this figure has improved significantly and is currently estimated to be around 4%.
According to some analysts, significant outperformance is unlikely in the banking stocks as they are currently not under-owned by institutions.
“Index management strategies may prompt a shift toward defensive stocks, particularly in the banking sector, however, the trajectory of inflation remains a key monitorable,” said Kaitav Shah, analyst, Anand Rathi Institutional Equities. “We continue to like stocks with strong moats like ICICI Bank, IndusInd Bank, Bajaj Finance, and Cholamandalam Financial.”
As per technical analysts, a majority of the indicators are pointing toward a bullish momentum in the Bank Nifty.
“We expect the momentum in Bank Nifty to continue with a potential target of 46,500 levels over the next few weeks,” said Vikas Jain, analyst, Reliance Securities. “The RSI (Relative Strength Index) is steadily climbing toward the upper band, and several other critical technical indicators continue to maintain their bullish momentum.”
