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    Contra View: What may go wrong for equity investors banking on financial stocks?

    Synopsis

    Banking and financial stocks are not expected to have a smooth ride as market experts hold contrarian views on the ability of the sector to sustain growth, despite Jefferies' Global Head of Equities Christopher Wood adding Axis Bank to his India Long-only portfolio in May. Small case managers and investors suggest asset quality and margin issues for some banks while FidelFolio Investments' Founder Kislay Upadhyay predicted a high interest rate scenario would impact access to capital, curb the ability to grow and maintain capital efficiency. Meanwhile, Devendra Phadke at Purnartha Investment Advisers said credit penetration at society's lowest strata has increased considerably over the last decade, which could cause credit issues both at the retail and enterprise levels.

    Contra View: What may go wrong for equity investors banking on financial stocks?iStock
    Besides HDFC Bank and ICICI Bank, Jefferies' Global Head of Equities Christopher Wood has added Axis Bank to his India Long-only portfolio in May. This has inspired a lot of confidence among investors in the banking & financial sector.

    But, will it be a smooth ride for investors willing to put their bets on banking and financial stocks? Market experts mostly hold a contrarian view on the sector.

    Here’s what they have to say about what the fault lines could be:

    While growth opportunities exist in pockets, the rally in banks could remain subdued, said Kislay Upadhyay, smallcase manager and Founder of FidelFolio Investments.

    "Bank Nifty has grown by about 28% in the last 1 year versus 12% for Nifty50. If we look at the EPS growth of the underlying companies, Bank Nifty has trumped Nifty50," said Upadhyay.

    He said Bank Nifty’s growth has been due to a combination of rerating and earnings growth. However, a deeper look indicates that not all banks have been able to maintain asset quality and margins over the last 1 year alone. The rally of these players is not truly justified, he added.

    Upadhyay said a high interest rate scenario from here may impact access to capital for most of the average players and curb their ability to grow and maintain capital efficiency. Their investments for the future could also take a back seat, he added.

    Already, their limited ability to pass on the increases in price to customers while maintaining asset quality and driving high disbursements has led to significant market share losses to the better players, Kislay said.

    "A few players have started showing early signs of asset quality issues, but it is masked due to increased disbursement. Others have suffered significantly in terms of margins," Upadhyay said.

    "Basically balancing margin, market share, and asset quality is something only a few banks/NBFCs have been able to do, but rerating and rally happened for all. This unjustified rally is a sort of bubble and will reverse," he warned.

    With a high-interest rate scenario remaining, the sector will see men getting separated from boys, Kisley opined.

    Meanwhile Devendra Phadke, smallcase manager and Principal Officer at Purnartha Investment Advisers, said the tailwinds of improving NIMs (net interest margins) could reverse if interest rates remain higher for a longer period. The NIMs have been rising for banks on account of rising interest rates for a year now, he pointed out.

    The situation could be adverse especially for PSU banks as NPAs start to build-up leading to change in fortunes, he argued. "This will ultimately lead to high credit costs," he added.

    He said NPAs could go up due to higher interest costs coupled with higher inflation, which will lead to credit issues both at the retail and enterprise levels. This will, in turn, lead to lower net interest margin for money lenders.

    "PSU banks and micro finance NBFCs could be the first in line to face the hit," the Purnartha Investment Advisers' expert said.

    He said credit penetration in the lowest strata of society has increased considerably over the last decade. If the interest rates continue to remain at an elevated level for an extended period of time, the sector might see risks emerging in this segment, Phadke said.

    Valuations of multiple banks and NBFCs are a little stretched while institutions (including FIIs) are already overweight on financials. “This suggests little upside potential as the market seems to be overlooking potential risks," the market expert said.

    Notwithstanding the above headwinds, the Indian banking system currently remains strong, both Phadke and Kislay opined.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



    ( Originally published on May 30, 2023 )
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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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