Back in vogue: Banks, financial services stocks lead market recovery

Banking and financial services stocks are among major gainers in the market rally in the past month, with 11 of the top 25 gainers in the NSE 100 belonging to this pack.

Nine of these have gained in double digits, with Bandhan Bank, Bajaj Finance, and Bajaj Finserve surging the most in the past month. The NSE 100 rose 6.1 per cent, while the Nifty Bank gained 8.5 per cent during the period.

According to experts, excess liquidity drove flows into beaten-down banks and financial services firms in the past few weeks. Market participants are hopeful the asset quality deterioration of banks and NBFCs would not be to the extent expected earlier, and that the lending books may recover fast enough.

“Banking and financial services stocks are an important proxy for the market and have the most weighting. The lifting of lockdown has boosted hopes of an economic recovery which has helped these stocks,” said G Chokkalingam, founder, Equinomics Research and Advisory.
 

“The moratorium percentage has dipped in some cases according to the latest disclosures. There are expectations that the period for moratorium would be extended by another three months beyond August-end,” said Deepak Jasani, head, retail research, HDFC Securities.

Analysts however believe the banking sector’s earnings are likely to remain muted and the pandemic will impact banks' growth and asset quality. The impact of rising NPAs (non-performing assets) may become discernible only in the second half of FY21 once the moratorium period is over, and medium and smaller banks may have to bear the brunt of the worsening asset quality.

“While the moratorium/standstill benefits continue, we expect banks to further strengthen their balance sheets by making healthy provisions. Moreover, declining interest rates, along with higher liquidity on balance sheets, should keep margins under pressure,” said a recent research note by Motilal Oswal Financial Services.

Jasani believes asset quality concerns persist and banks may need capital infusion. “NBFCs may face the additional challenge of raising funds as banks may not be willing to lend to below-AAA-rated NBFCs. NBFCs functioning in niche areas, such as gold or microfinance, and with a larger spread, may be better placed,” he said.

According to Chokkalingam, large banks and NBFCs have run up a lot and maybe ripe for a correction. “The valuations of top NBFCs are especially stretched. Market participants have discounted the June quarter results and are not factoring in the possibility of adverse numbers that may emerge in the next two quarters,” he said.

Jasani says investors will have to learn to trade cycles and a buy and hold strategy may not work at these levels. “Investors will be better off booking profits after small upsides from their entry levels,” he said.