scorecardresearchRecent rate hikes to weigh on the upside potential of the BFSI stocks;

Recent rate hikes to weigh on the upside potential of the BFSI stocks; A look at top stock picks

Updated: 14 Jun 2022, 12:51 PM IST
TL;DR.

Let's understand, how these recent rate hikes will impact the banking and financial services sector and look at some top stock picks from the sector.

Let's understand, how these recent rate hikes will impact the banking and financial services sector and look at some top stock picks from the sector.

Let's understand, how these recent rate hikes will impact the banking and financial services sector and look at some top stock picks from the sector.

In an effort to curb inflation, the RBI announced a 50 bps repo rate hike in its June monetary policy meeting, very soon after its out-of-turn 40 bps rate hike last month. Although the banking and financial services sector has witnessed multiple interest rate cycles in the past, experts believe that this rate hike cycle is different on account of its accelerated nature and uncertainty regarding inflation.

Since May, both the Nifty Bank as well as the Nifty Financial Services indices have lost over 8 percent each. This decline is in line with the fall in the benchmark Nifty, which has also fallen around 8 percent in this time.

Let's understand, how these recent rate hikes will impact the banking and financial services sector.

As per domestic brokerage house HDFC Securities, unlike in the past, banks are likely to witness margin accretion during this stage of the up-cycle, given a near-complete pass-through on the asset side of the balance sheet thus far.

However, the margin-pop is likely to be short-lived (next couple of quarters) with the pace of asset-side transmission gradually diminishing and lagged re-pricing of deposits, it said.

Meanwhile, Naveen Kulkarni, Chief Investment Officer, Axis Securities believes that due to such a surge in inflation globally, the US Fed Reserve's action to tackle rising inflation would include an aggressive interest rate hike, which is likely to impact the overall demand, thereby impacting the margins and profitability of corporates.

Similarly, aggressive rate hikes could further spook FIIs, who have been net sellers since Oct'21. Thereby, further correction is not only caused by the banking and financial stocks, but overall equity markets, he added.

"Like in the US, inflation remains a cause of concern in India too. The recent revision of inflation estimates by RBI has hinted at the need for further rate hikes, possibly of a similar quantum as seen in Jun'22. This is likely to weigh on the upside potential of the BFSI stocks in the near term," Kulkarni pointed out.

Rohit Khatri, Fundamental Analyst, Religare Broking is of a similar view. He also noted that the rising inflation has been a big cause of worry for central banks across the globe including India. This has prompted central banks to go aggressive on rate hikes to curb inflation.

"In India, inflation continues to remain above the RBI’s comfort zone of 6 percent which has led the MPC to raise rates by 9 0bps in the last two months alone and with more hikes expected ahead. Rising interest rates are usually not good (if continued for a prolonged period) for lending companies as it impacts aggregate demand which in turn affects credit offtake," Khatri explained.

Stock picks

Among individual stocks, HDFC Securities identifies ICICI Bank and SBI as best placed to capitalise on this stage of the rate cycle.

Khatri also strongly advocates sticking with large private sector banks as not only have they managed to show resilient asset quality but also delivered healthy loan growth. Moreover, they have a strong liability franchise and are better placed to tide over the current rising interest rates environment, he noted. Therefore, HDFC Bank, ICICI Bank, Kotak Bank, and Axis are Religare's top picks in the private banking space and within PSUs, they prefer SBI.

Kulkarni from Axis Securities prefers ICICI Bank, SBI, and Federal Bank among lender.

ICICI Bank has been outperforming its peers and ticking most boxes on growth, margins, and asset quality, he said.

Kulkarni further noted that SBI remains the best play amongst the PSBs on the gradual recovery of the Indian economy with its healthy PCR, robust capitalization, a strong liability franchise, and an improved asset quality outlook.

Also, Federal Bank's increasing retail focus, strong fee income, adequate capitalization, and prudent provisioning are key positives, he stated.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

 

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First Published: 14 Jun 2022, 12:51 PM IST