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Why Bank and Financial Services Sector look attractive despite a good fall in the Sector Index

Why Bank and Financial Services Sector look attractive despite a good fall in the Sector Index

Published on 30 December 2021 .Views 91 .Comments 0
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In the past few weeks, Banking and Financial Sector Indices were down by around 15%-17% from their peak. The Bank Nifty is currently trading at the levels of 35,000 from its higher levels of 45,000. So, let’s talk about some of the possible reasons behind this fall in Banking & Financial Sector Stocks and also how this sector looks attractive for the coming period.

Possible Reasons of Fall in Banking & Financial Sector Index:

  • The major reason behind the falling of the Banking & Financial Services Sector Index was due to selling off by the Foreign Institutional Investors (FIIs). The Foreign Institutional Investors (FIIs) have sold funds worth $3.3 Billion or Rs. 24,600 Cr. in the Banking and Financial Services sectors. This outflow or selling of stocks by FIIs has happened in the last 2 months between October 15 to December 15.
  • In the last 10 fortnights, FIIs have remained as net sellers in the Banking & Financial Sectors. This selling by FIIs in the current period is more than the selling by FIIs in March 2020. Despite this fact, there is not much fall in major indices currently as compared to fall in Nifty & Sensex in March 2020 as during that time there were fear factors across the board and was not only with FIIs but also with Domestic Institutional Investors (DIIs). But same is not the case now where DIIs and retail investors are here to support the market.
  • Next, due to the developing threat of Covid-19 Omicron Variant, FIIs might be feeling that the trend like the second wave of Covid-19 could happen again and businesses might be hampered which ultimately affects Banking & Financial Services Sector as the Non-Performing Assets (NPAs) could again come under pressure.
  • The same underconfidence of FIIs can be witnessed in the shareholding pattern of FIIs where they have reduced their stake by 4.44% QoQ in the Banking and Financial sectors. Overall, the allocation of FIIs inflows was around 34%-35%, which has now come down to 30.4% to $194 Billion.

Why Banking and Financials Sector can perform well in CY22:

  • India is an emerging economy and there is a high growth prospect due to which the Credit Parameter becomes so crucial to the lookout.
  • It is interesting to see how the Credit Ecosystem has developed in the country where Banks are playing a crucial role. Here, Non-Banking Financial Companies (NBFCs) also have a key role in the credit ecosystem. But if Banks are compared with NBFCs, Banks has more potentials as they have deposit raising capacity that too with low cost.
  • Hence Scheduled Commercial Banks (SCBs) can play a vital role not only in the sector itself but in the overall economy as well.

Valuation of Bank Nifty:

  • On 1st April 2021, the level of Bank Nifty was around 33,858 with a PE ratio of 26.30, which gives us the Earnings Per Share (EPS) of Bank Nifty of 1,287.
  • Whereas on 29th December, the level of Bank Nifty is ranging around 35,000 levels with a PE ratio of around 21.75, which leads to the Earnings Per Share (EPS) of around 1,611.
  • The above data shows that Bank Nifty has just risen by around 3.4% between April 2020 to December 2021 vis-à-vis the earnings of Bank Nifty has improved by around 25%.
  • In the recent past, there was heavy FIIs selling, which led to the tumbling of the PE ratio. But looking at the record, one can notice that the Banking and Financial Services Sector has always remained the favorite of the institutional investors, and with the currently reduced stake of FIIs to 30% from the normal level of 34%-35%, a normal consensus can be built that it may again come to the standard or normal level in the coming period.

2 Banks to Keep a Close Watch:

  • Earlier, there were some recommendations provided to the Reserve Bank of India for the internal working group on corporate ownership of private sector banks wherein Promoters needed to take down their stake to 15% after a certain period has now altered the same, and has raised the limit to 26%.
  • On 26th November 2021, RBI announced that "This stipulation should be uniform for all types of promoters and would not mean that promoters, who have already diluted their holdings to below 26%, will not be permitted to raise it to 26% of the paid-up voting equity share capital of the bank,"
  • With this earlier recommendation, there was majorly pressure on the 2 promoters of the 2 leading private sector banks i.e., Uday Kotak from Kotak Mahindra Bank and Hinduja Group from IndusInd Bank.
  • Uday Kotak currently owns around a 25.7% stake in Kotak Mahindra Bank, and with this new relaxation on the promoter’s shareholding norms, he will surely get some relief. While Hinduja Group, promoter of IndusInd Bank wishes to take up their stake to 26%, the new limit from its current stake of 15%.
  • In the case of IndusInd Bank, where it seems that the Promoter will be infusing money in the bank, it will certainly lead to a rise in Capital Adequacy Ratio which is a positive sign for the company.

What Should Shareholders Do?

As of now, the overall situation of NPAs looks normal, the Central Bank of India- Reserve Bank of India has also stated that NPAs situations are under control, provisioning is also good, and normalcy is coming back in the economy. Thereby if things remain intact and Omicron Variant does not cause much harm, inflow in Banking and Financials Sector can come back again. Although Banking Sector is one of the interesting sectors, one needs to keep on his/her radar. Hence aggressive investors can tap on this opportunity, but Conservative or Moderate Investors should assess the situation more carefully and then only take decisions.

Originally Published On: https://blog.investyadnya.in/why-bank-and-financial-services-sector-look-attractive-despite-a-good-fall-in-the-sector-index/

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