Banking stocks have been under pressure of late, primarily due to the sustained outflow by foreign institutional investors (FIIs) amid concerns over rate hikes. Banking stocks are sensitive to rate movements.
While FII selling is a negative for the sector, the prospects of aggressive rate hikes are additional concerns for the sector.
Yash Gupta, Equity Research Analyst, Angel One underscored that the banking sector has seen a good correction due to the global selloff and FII continue selling in the Indian market for the last eight months.
So, should you consider banking stocks just because they have valuation comfort? What about rate hikes?
The RBI increased the repo rate by 40 bps to 4.4 percent and the CRR rate by 50 bps to 4.5 percent in early May. The hike reversed the 40 bps cut in May 2020 but is still lower than where we were in March 2020 and unadjusted for the higher inflation prints.
Kotak Securities expects another repo rate hike of 25 bps in the June policy and additional consecutive repo rate hikes of 75-100 bps in FY2023 (including the 25 bps hike in June), contingent on inflation moving towards the 4.5-5 percent mark by the end-FY23.
Banks are likely to gain from the country's economic growth. Rate hikes remain a reality but it is a short term phenomenon and also, banks have the option to pass on the rate hikes to borrowers.
"The relationship between the performance of banks and rate cycles is not uniform when we look back since 2000. In our view, a lot of performance is dependent on the then prevailing view of the confidence we have in economic growth and perhaps its consequent impact on asset quality," said Kotak Securities.
"We expect housing finance companies (HFCs) to pass on the same to existing borrowers by raising their PLRs. Home loans offered by banks are linked to external benchmarks and hence rate transmission on bank home loans will now be much faster as compared to the previous cycle. Further, banks have already started to raise home loan rates reflecting margin discipline," said Kotak Securities.
Banking stocks value buys?
Most analysts are positive about banking stocks and expect them to give good returns because of their cheaper valuation and hopes of healthy economic growth.
"To a large extent rate hike is priced in by most large banks as they are down by over 20 percent. Valuation multiples have contracted substantially. On the other hand, banking credit growth returned to double digits and NPAs also moderated significantly, hence it is time to consider large private banks now," said G Chokkalingam, Founder, Equinomics Research & Advisory.
Vinod Nair, Head of Research at Geojit Financial Services expects the leading finance stocks to outperform the broad finance industry due to the better balance sheet, access to funds and being the first beneficiary of rising credit growth in India.
"Yes, they continue to be a value buy being trading just below the long-term P/B average though volatility can prevail in the short-term," said Nair.
"FIIs are on a risk-off strategy, their high exposure in the finance sector has led to a sharp sell-off in the banking industry compared to the broader market, which was driven by industrials and others. We can expect this trend to change when the FII’s selling spear moderates in the future having sold heavily in the last one year, while industrials and others consolidated due to a change in investment ideology from growth to value and defensive. Finance industry dynamics are improving like a drop in NPAs and rise in advances while the rupee will be supported by the rise in interest rates reducing FIIs selling," said Nair.
Raj Vyas, Portfolio Manager, Teji Mandi does not look worried about the FII selling of banking stocks.
"Whenever equity markets go through this regime shift from very low-interest rates to high-interest rates, normally you see some sort of selling by the FIIs and volatility in the market and now the rising inflation further adds fuel. But looking at the economic conditions, where consumers and corporate balance sheets are strong, earnings are still growing, valuations coming down, and positioning by the FIIs is extremely light, we do not expect any further pain. So at this point of time, the suggestion for investors would be to not sell but rather remain invested if already bought and also one can invest fresh funds gradually," said Vyas.
Vyas expects the banking sector's loan growth to improve further from here on as the economy opens up and normalcy has returned back after a gap of two years owing to Covid-19.
"Incrementally loan growth will come at a better rate in a rising interest rate scenario which may aid margins in the near terms, especially for those banks who have high low-cost deposit share or CASA ratio. With capex spend also expected to be coming back in the next few quarters say 12-18 months, the prospects for the sector look good," said Vyas.
Gupta of Angel One pointed out that currently, Nifty Bank is trading at price to book value of 2.55 times which is below the last one-year average of 2.83 and the last two-year average of 2.61.
"We are bullish on Bank Nifty as we believe that currently banking companies' balance sheets are very clean and all the provisions and write off has been done in the last five years along with that it is trading at comfortable valuations. The rate hike cycle will not materially impact the banks as they also continue to take rate hikes as we have seen in the recent rate hike of 40 bps," said Gupta.
Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.