Financials rally up to 7% on report govt could notify NBFC resolution rules

Bank and non-banking financial companies (NBFCs), including ICICI Bank, HDFC, HDFC Bank, Cholamandalam Investment and Finance Company, and Axis Bank rallied on Thursday on report that the government was mulling resolution process for stressed NBFCs.

Under the process, the government is likely to introduce a special window under section 227 of the Insolvency and Bankruptcy Code (IBC), which would give "special dispensation" on who could initiate the resolution process, on moratorium, and to resolution professional, business channel CNBC TV-18 reported.

Government was considering the move to deal with special cases or class of cases, and could notify the rules in two weeks, the report added.

Subsequently, the shares of financials rallied at the bourses. Among individual stocks, Edelweiss Financial Services was the top gainer (up 6.5 per cent), followed by Bank of India (4 per cent), Bank of Baroda (4.5 per cent), ICICI Prudential Life (4.6 per cent), Cholamandalam Investment and Finance Company (4.6 per cent), and ICICI Bank (5.6 per cent).

Other financial stocks such as Bajaj Finance, Bajaj Finserv, HDFC Bank, IDFC First Bank, IndusInd Bank, M&M Financial Services, Axis Bank, Punjab National Bank (PNB), and Canara bank gained in the range of 2 per cent to 3.4 per cent.

Moreover, Kotak Mahindra Bank, ICICI Prudential, ICICI Bank, and HDFC Life hit fresh 52-week high. 

However, some financial stocks, with weak fundamentals, missed the rally. For instance, Indian Bank, YES Bank, and Indiabulls Ventures slipped up to 9 per cent.

At 1:30 pm, Nifty Private Bank index, Nifty PSU bank index, and Nifty Financial Services index were trading 1.25 per cent, 1 per cent, and 0.85 per cent higher, respectively. In comparison, the NSE's Nifty50 was ruling 0.85 per cent higher at 11,538 levels.

NBFCs are facing a liquidity crunch, triggered by fall-out of IL&FS, and DHFL. With funds drying up at NBFCs, they are finding it difficult to raise more money or repay debt already taken, leading to blockage of flow of credit in the economy.

So far in calendar year 2019, Nifty Financial Services index has outperformed the frontline 50-share index by rallying 13 per cent, as against a 5 per cent rise in the Nifty50. Nifty Bank and Nifty Private Bank indices, too, have added 9 and 8 per cent, respectively, while Nifty PSU Bank index has slipped 23 per cent during the same period.

Of late, the government and the Reserve Bank of India (RBI) have taken several steps to aid NBFCs, which have been reeling under crisis since last one year. Under the Budget for 2019-20, the government proposed to provide a one-time partial credit guarantee worth Rs 1 lakh crore to public sector banks (PSBs) for the purchase of pooled assets of financially sound NBFCs and HFCs.

Should you buy financial stocks?

Last week, Finance Minister Nirmala Sitharaman slashed effective corporation tax to 25.1 per cent. Most analysts tracking the sector believe a reduction in tax rates will have two positives – higher profitability and, thereby, return ratios for profitable lenders with capex could revive growth cycle back into action.

"An improvement in corporate earnings and increased manufacturing capex is expected to further add to banking sector’s business potential," said ICICI Securities.

"HDFC Bank, Kotak Bank, IndusInd Bank and other retail banks will be the biggest beneficiaries as they pay tax at a high rate (~34 per cent) and carry low stock of deferred tax assets (DTA). On the other hand, Axis Bank and ICICI Bank have higher DTAs, which will need to be marked down to the revised tax rate. This will impact their earnings in FY20, while the full benefit will accrue from FY21. Thus, Axis Bank/ICICI Bank’s earnings are estimated to see a downgrade of ~13 per cent/~14 per cent in FY20 but see an upgrade of ~12 per cent/~8 per cent in FY21," analysts at Motilal Oswal Financial Services (MOFSL) wrote in note, dated September 24.

ICICI Securities is bullish on SBI, Axis Bank, HDFC Bank within the banking sector and M&M Finance, Bajaj Finserv and SBI Life Insurance within non-banks.

Kotak Securities, on the other hand, believes positive impact on loan growth and provisions will be offset by by lower treasury. "We maintain estimates but the long-term impact of RoE improvement is debatable. The impact on non-banks is mixed with lower tax rates (partially offset by lower net interest margin in select cases) for NBFCs, negligible impact on HFCs that already enjoy 26-27 per cet tax rates," the brokerage added.