The Bank Nifty index that tracks the market capitalisation of the top 12 banks has turned a laggard after years of outperformance. Banks were a laggard on Monday, as well and the Bank Nifty ended the day with a loss of 0.21 per cent, against a 0.21 per cent gain in the benchmark index.
In contrast, during the first 12 months after the Covid’s global outbreak (March 2020 to February 2021), the Nifty Bank had rallied 82 per cent, against a 69 per cent rise in the Nifty50. Banks were also a big outperformer during the pre-pandemic period.
For example, the Bank Nifty was up 62 per cent between January 2015 and December 2019, against a 38 per cent rally in the benchmark Nifty50.
Many analysts expect the performance gap to widen in the forthcoming quarters. “We are underweight on banks currently and see a lot of headwinds for the sector, going forward,” says Dhananjay Sinha, MD and chief strategist, JM Financial Institutional Equity. The biggest worry for analysts is a steady decline in revenue growth that can make it tough for banks to sustain the current level of profits in the upcoming quarters.
“The sharp recovery in the Bank Nifty from 2020 lows was built on the promise of a fast recovery in growth, besides expectations of lower-than-expected losses from Covid-19. But the recovery remains elusive and this has started to weigh on stock prices of banks, says Sinha.
The aggregate non-food credit was up only 5.3 per cent YoY during the first four months of FY21, according to the data from Reserve Bank of India. “Low single-digit credit growth may not satisfy the markets. Banks require double-digit growth in their loan book to outperform the broader market,” says G Chokkalingam founder & MD, Equinomics Research & Advisory Services.
This was a reversal for the industry as until now retail credit segment was believed to be relatively safe with low probability of default and bad loan, unlike the corporate loan segment. This had made it a big growth driver for the banking sector.
Besides, growth in retail loans has also been hit by a decline in household income during the Covid period.
Analysts say that revenue growth of banks has also been hit by a decline in yields or interest that they charge on loans during the pandemic period. For example, the yield on banks loans declined to a 12-year low of 8 per cent in FY21, from 8.9 per cent in FY20 and a high of 9.6 per cent in FY13.
Initially, banks benefitted from the low-interest rate regime by cutting their deposit rate even further. Banks average cost of fund was down nearly 90 basis points to around 4.2 per cent, expanding their net interest margin or spread. Analysts fear these gains will now reverse as bond yields and interest rates are on the rise again.
Analysts fear that all these factors will come to head in FY22, putting a spanner in growth and profitability of banks in FY22.
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