Financial stocks' Nifty contribution touches 18-month high in November

In November, these stocks account for one-third of all stocks in Nifty 50

About a third of the Nifty 50 index weightage now belongs to the banking and non-banking financial company (NBFC) stocks. The weightage of the financial sector stocks in the Nifty is on the rise again, touching an 18-month high of 30.5 per cent, just shy of its May 2013 high of 30.6 per cent.

Analysts said the contribution of banking stocks would rise with investors continuing to prefer these stocks backed by the Reserve Bank of India’s indication of a rate-cut early next year and the continued optimism on India’s upward growth trajectory.

Historically, financial-sector stocks have always commanded anywhere between 25 and 27 per cent of the total weightage in the Nifty, analysts said.

Since May 2013, the weightage of these stocks was on a downtrend as economic outlook turned dangerously sour leading to sharp drop in stock prices.

Ten of the Nifty 50 stocks belong to banks and NBFCs. At seven per cent, ICICI Bank has the highest weightage among these stocks followed by HDFC at 6.28 per cent and HDFC Bank at 6.17 per cent.

State Bank of India has seen its weightage climbing to 3.4 per cent from 1.9 per cent at the beginning of the year.

Analysts believe the contribution of the banking sector is expected to move up based on the change in earnings outlook for these stocks.

“Going forward, the spreads in the business for the banks is going to be better in the coming quarters. Earnings estimates at this point have not yet factored in the new inflation figure, the new petrol prices or even the rate-cut. This means there could be an earnings upgrade for these stocks in the future, further pushing up stock prices,” said Sudhakar Ramasubramanian, managing director, Aditya Birla Money.

Some believe the weightage of these stocks in the benchmark could plateau at around 35 per cent.

The rally in the banking stocks began early this year as the market raced ahead in hopes of a Narendra Modi-led government at the Centre. After the elections, optimism in the market returned, giving a push to the banking stocks that are considered to be the first beneficiaries of a turnaround in economic outlook.

The Bank Nifty has climbed 64 per cent this year, compared to the Nifty’s 35 per cent. According to experts, investors’ interest has slowly started moving in the direction of state-owned banks, which have till now trailed private-sector lenders in terms of returns.

Analysts believe a cut in interest rates by the RBI early next year will boost earnings of public-sector banks and reduce the concerns about poor credit quality. Private-sector banks are generally known to have a much more efficient capital allocation than their public-sector peers, analysts say.

“In a falling interest-rate scenario, credit growth would pick up and the capex cycle would also see a move up fuelling economic recovery. All of this would lead to higher earnings growth for the PSU banks,” said Nikhil Golani, head of institutional equity at Tata Securities.

Analysts believe valuations may look a little expensive in the near-term, but these stocks have sufficient upside left.

“Liquidity is not an issue for these stocks even though many of them are close to exhausting their foreign investor stake limits. There is enough appetite among the retail and domestic institutions for these stocks who are looking to enter at these levels,” said Ramasubramanian.