While the most common advice for long-term investors on Dalal Street is to buy largecap bank stocks, FIIs have been selling financial stocks incessantly to the extent of nearly Rs 40,000 crore in just 2 months amid fears that the proverbial Goldilocks period could be over.
After being net sellers in financial services to the extent of Rs 30,013 crore in January, FIIs sold another Rs 9,977 crore last month. Those facing most of the overseas wrath are heavyweight HDFC Bank (down 15% year-to-date), Bajaj Finance (down 14%) and Kotak Mahindra Bank (down 8%).
After the Covid-19 pandemic, banks experienced a steady enhancement in their Return on Assets (RoA) from FY20 due to improved operating performance, marked by margin expansion, decrease in credit costs and improvement in asset quality.
Industry trackers say the heydays are now over as RoAs will decline gradually due to continued pressure on margins and slower loan growth as loan-deposit ratios are stretched.
Bank margins are expected to decline amid repricing of deposits at higher rates as well as limited scope for a further rise in yields. “We believe all players face the dilemma of maintaining market share or compromising margins amidst the backdrop of stronger balance sheets across the system,” said Rahul Jain of Goldman Sachs.
Analysts expect a limited improvement in credit costs from here on, as the best of the asset quality cycle is already behind. “This will ensure a gradual decline in RoA for banks and would be weighing over their valuation premium. We should see a consolidation phase for stock
prices in the banking sector till the margins start witnessing an improvement,” Jignesh Shial of InCred Equities pointed out.
The December quarter earnings season was slightly muted for banks on a sequential basis with retail/SME driving credit growth. Some pick-up was also seen in the corporate lending segment. Banks indicated that they would calibrate growth in the unsecured segments (as the stress is visible in certain pockets) and will pursue growth where risk-reward is favourable.
Goldman has pointed out three major headwinds for the financial sector – rising pressure on cost of funds, growing concerns on rising consumer leverage and pressure on operating costs.
In the near to medium term, CRISIL Ratings expects a compression of 10-20 bps in net margin as deposit rate hikes play out. “Banks are likely to walk the tightrope between growing their deposit base and protecting profitability, depending on their ability to mobilise cost-effective deposits. This, in turn, will determine their pace of growth,” the ratings agency said.
Risk-reward favourable in bank stocks
However, most analysts are of the opinion that the risk-reward ratio is favourable in largecap private sector bank stocks.
“With a deep correction in HDFC Bank and a lukewarm response to the positive surprise in ICICI Bank, our top two ideas look even more attractive. AXSB, our third preference, remains most geared to liability easing as rates ease due to higher proportion of short-term borrowing,” Santanu Chakrabarti of BNP Paribas said.
Goldman has downgraded ICICI Bank and SBI to neutral rating, SBI to sell and upgraded Bajaj Finance to neutral. It has maintained a buy call on HDFC Bank.
Within financials, Axis Securities has picked ICICI Bank, SBI, Bank of Baroda, Federal Bank and CreditAccess Grameen.
(Data: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
