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Will banking rally sustain?

Fresh NPA onslaught could come back to haunt banking funds; investors sitting pretty can book profits

Sanjay Kumar Singh  |  New Delhi 

Image via Shutterstock
Image via Shutterstock

have rallied 17.3 per cent over the past three months (according to category average data from Value Research), compared to the broad market index, Nifty 50, which is up 8.23 per cent. Investors keen to profit from this rally should, however, assess carefully the sector’s fundamentals.

The current rally in banking, say experts, is part of the broader ‘risk-on’ rally in global markets, following the recovery in commodity prices. The second factor is fund flows. Banking constitutes 25-35 per cent of the major indices. “Whenever fund flows come in, especially from foreign exchange-traded funds (ETFs), a large part of it gets invested in banking stocks,” says V Srivatsa, fund manager, Third, the sector’s underperformance before the current rally had made valuations attractive.

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At the fundamental level, the picture remains one of a sector mired in difficulties. has been muted, especially in the past year, but is expected to gain momentum. “We expect the sector to witness low double-digit over the next year. It could be as high as 15-20 per cent for many private sector banks,” says Srivatsa. As for non-performing assets (NPAs), the worst might not be over. Says Shiv Chanani, fund manager-equity, Sundaram Mutual: “While many companies have been aggressively selling assets, these sales constitute a small part of the overall NPAs.” Srivatsa adds there could be a couple more quarters of stress. The one-year category average return of the sector (minus 7.53 per cent) reflects its ongoing problems.

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Experts segregate the sector into three sub-groups. First, retail-oriented private sector banks, in a sweet spot due to strong retail and their own low cost funds. The second comprises private banks with sizable corporate portfolios. While these face issues in their corporate portfolios, their losses will be mitigated by significant retail operations.

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In the third bucket you have public sector banks (PSBs), facing the largest stress due to asset-quality issues. Over the past five years, their competitiveness has got eroded, as their (NIMs) have fallen. Many have gross NPAs of 8-15 per cent. In the future, they might cede ground to private sector players on the corporate loan side. The March quarter results of several PSBs point to their continuing difficulties with bad loans. Punjab National Bank, Bank of Baroda, Central Bank of India, UCO, Dena and Allahabad Bank have all reported losses.

For the rally to sustain, two conditions need to be fulfilled. “There has to be a pick-up in industrial credit growth and a clear pathway has to be created for banks to address the problem,” says Chanani. Banks have to first recognise the losses on their books. After which, there will be greater clarity on their recapitalisation needs and then the government needs to provide the required capital. There is, of course, a question mark on how much capital it can afford to infuse. Srivatsa expects the sector to perform in the long term. “An investor could see good upside over an 18-month to three-year horizon, as credit growth catches up and asset quality stabilises,” he says.

Financial planners feel a sector fund is better suited for professional investors who track the sector and can time their entry and exit. “Retail investors would be better off investing in diversified-equity funds,” says Anil Rego, chief executive officer, Right Horizons.

Professional investors with a view on the sector but not in a position to pick stocks themselves could invest in these but their exposure should not exceed five to seven per cent. Investors with a long-term horizon should preferably invest via a systematic investment plan. Those who already have an exposure to banking sector funds should book some profits after the recent rally.

First Published: Thu, May 19 2016. 23:02 IST