Large private sector banks are safe bets for investments in BFSI stocks

High collections boost sentiment, but clarity on gross NPAs will emerge only after December

The Nifty Financial Services Index is down 8.9 per cent over the past year. However, it has rebounded strongly in recent months: It has risen 13.8 per cent over the past month and 16.4 per cent over the past three months. The big question is whether this rebound will sustain.  

A number of factors have contributed to the recent rally in banking and financial services stocks. “Going by the high-frequency indicators, the economy appears to be getting back on its feet. And while earlier there was talk that banks would have to bear the interest cost on loans under moratorium, now it seems only the interest-on-interest will be waived, and even that burden would be borne by the government for loans up to Rs 2 crore,” says Dhimant Kothari, fund manager, Invesco Mutual Fund.

When the lockdown started, estimates on the percentage of loans that would go for moratorium were very high at about 30 per cent. But major private sector banks reported a collection efficiency of 95 per cent in the last week of September and 97 per cent in the first fortnight of October. “Whether it is asset quality slippage or restructuring requests, the figures, according to guidance provided by the management of leading private sector banks, are likely to be much lower than anticipated,” says Monalisa Shilov, director and investment specialist, Trivantage Capital, a boutique asset management firm focused on the financial sector.  

Large private sector banks have also capped their downside risks by provisioning upfront. “They did both Covid-led provisioning and contingent provisioning and raised capital during the past two-three quarters. So, concerns about them have subsided to some extent,” says Jaikishan Parmar, senior equity analyst-BFSI, Angel Broking.  

The liability side of many of these large private-sector banks has witnessed traction. Depositors nowadays wish to keep their deposits with large, private sector banks that are deemed to be safer. This has led to an improvement in their current and savings account (CASA) ratios, which will come in handy when credit growth rebounds. “Their funding cost has declined more than their lending rates, allowing them to maintain their net interest margins (NIMs) in the September quarter,” says Shilov.

Valuations of many large private-sector banks were at depressed levels earlier. So, when they reported moderate to above-average numbers, there was a rally in these stocks.

However, it would be a mistake to believe that the sector is completely out of the woods. In the September quarter, banks were unable to calculate their actual gross NPA figures, due to restrictions imposed by the Supreme Court. “It is only at the end of December that we will have the actual picture on gross NPA levels and restructuring numbers of banks,” says Parmar. If these figures come out higher than the guidance provided by managements, these stocks could take a hit. Another risk arises from the pace of economic recovery. The collection efficiency numbers are for a limited period, and need to sustain for longer.

For the present, investors investing directly in banking and financial sector stocks will be safer sticking to larger, private sector banks as they have the capital necessary to absorb asset quality issues. If you are investing in a banking and financial services sector fund, go with one that has a long and consistent track record. Gold lenders and insurers are also well placed within the BFSI sector.