Despite a sharp accretion of bad loans and slowing growth in credit, the Bank Nifty has gained 22 per cent over three months, while the Nifty is up 9.4 per cent. Nothing has materially changed for the sector, with public sector banks continuing their battle against bad loans, even as private banks continue to forge ahead. While the push for financial reforms in Parliament is a key driver, several other factors could improve the sector’s fortunes.
For starters, banks — a proxy for the economy – will see a rebound in credit growth next year, as gross domestic product growth revives. Typically, when interest rates come down, stock prices tend to go up. Citi is positive on the sector and sees “reasonable returns on improving macros and bottoming micros”. As for PSU banks, the broader perception in the market is that asset quality has started improving and once the Reserve Bank of India (RBI) starts cutting rates, things would improve. The market is building in rate cuts and a consequent uptick in loan growth in FY14. Ambit Capital expects PSU banks to outperform in the near future, as it sees signs of these stocks bouncing back from their relative lows. The market expects PSU banks to end the year with earnings growth of 11 per cent.
Besides, share prices of listed non-banking financial companies have also run up sharply over the last few weeks, in anticipation of the Banking Laws (Amendment) Bill getting Parliament’s nod. The passage of the Bill will enable RBI to issue new bank licenses. The existing set of guidelines, analysts claim, negates the chances of entities which are engaged in broking or are associated with the real estate market. Antique Stock Broking says RBI has kept subjectivity like diversified ownership, professional management, feedback from regulators, Income Tax and Central Bureau of Investigation, coupled with assessment of business plan for financial inclusion, which will help the apex bank hold final discretion in granting the licences. It says, “Given the above criteria, we think L&T Finance Holdings, Shriram Group and Mahindra & Mahindra Financial Services have a strong chance of getting new licences.”
L&T Finance Holdings stands a strong chance, for its diversified shareholding and the absence of promoters. M&M Financial has a strong rural footprint and over 50 per cent of its loan book is categorised as priority sector lending. However, its parentage and loans given to purchase the products of M&M could be a hindrance. Shriram Capital also fulfils most of the criteria.
