bank stocks: Outlook 2022: Will bank stocks reverse their 2-year underperformance?

MUMBAI: Financial institution shares are a puzzle within the Indian inventory market. Buyers appear satisfied that the sector is among the solely remaining islands of cheap worth in a market filled with shares with terribly inflated valuations.

On the identical time, the Nifty Financial institution index is on the right track to mark its second straight 12 months of underperformance to the Nifty50. The banking index trailed the returns of the benchmark by 1,000 foundation factors in 2021, after a 1,800-basis level underperformance in 2020.

But, phrase on the Avenue is that financial institution shares are a low-hanging fruit for buyers. “For me, banks stay a purchase the place you constantly purchase banking shares proper by the area. Each correction is a purchase on dips for me,” Sunil Subramaniam, managing director and chief govt officer at Sundaram Mutual Fund, informed ETNow not too long ago.

The professional-bank-stocks foyer has loads going for it. Originally of the pandemic, the sector was the one to keep away from given the drastic repercussions of the nationwide lockdown on the economic system, which might have straight led to a extreme rise in dangerous loans for lenders.

Lenders have managed to emerge from the doomsday situation in a greater form than most thought was potential. True, forbearance supplied by the Reserve Financial institution of India got here in helpful, whereas filth low cost rates of interest allowed a few of the well-to-do banks to boost capital in bucket hundreds final 12 months. However the sector has managed to maintain stress at manageable ranges whereas on the identical time enhance the well being of its steadiness sheet.

Within the quarter ended September, most banks reported decrease slippages and provisions, regardless that the healthiness was not as broadly distributed as is mirrored within the actions taken by the regulator at RBL Financial institution over the weekend.

The most typical argument in favor of financial institution shares stays the approaching progress in loans because the economic system heals from the scarring of the pandemic. With the company steadiness sheet additionally enhancing, buyers see no purpose to doubt the onset of a brand new funding cycle within the economic system, which would require funding from banks.

“We imagine that the banking & NBFC area can be the most important thematic guess for subsequent 12 months. Furthermore, we anticipate credit score progress to select up subsequent 12 months, which together with cheap valuations ought to result in a rerating for the sector,” mentioned Jyoti Roy, DVP-Fairness Strategist, Angel One.

DOUBTS PERSIST
For all of the arguments round cheap valuations and impending mortgage progress, proof for a similar doesn’t quantity to a lot.

Non-food credit score progress within the banking sector was at a paltry 6.9 per cent year-on-year in October, though up from 5.2 per cent within the year-ago interval. Nonetheless, non-food credit score progress within the first seven months of the present monetary 12 months was at an abysmal 0.8 per cent, reflecting weak demand for credit score within the economic system, particularly from the company sector, RBI knowledge confirmed.

“We anticipate credit score progress to stay constrained, averaging at 6.7% YoY over the subsequent a number of years, until sufficient recapitalisation can mitigate the danger aversion presently seen amongst banks,” mentioned score company Fitch in a latest report.

The issues over sluggish mortgage progress are mirrored in the truth that 9 out of the 12 shares on the Nifty Financial institution have underperformed the Nifty50.

POSITIONING PUZZLE
Whereas the Avenue stays optimistic over the prospect of banks subsequent 12 months, the positioning by some massive buyers tells a special story.

Home mutual fund managers, among the many loudest voices in help of investing within the sector, have trimmed their publicity to personal banks by 180 foundation factors over the previous 12 months, knowledge compiled by brokerage agency Motilal Oswal Monetary Companies confirmed. The trimming of place in personal banks has been partially reallocated to public sector banks.

Overseas buyers have had a love-hate relationship with the sector provided that even in months the place they’ve been web patrons of Indian equities, they bought financial institution shares. FPIs have web bought financial institution shares price Rs 29,400 crore in 2021 until November whereas they’ve web bought Indian shares price Rs 21,000 crore.

VERDICT
Given the underperformance of the sector to the broader marketplace for two consecutive years, betting on the sector to return up trumps in 2022 wouldn’t be essentially the most ludicrous concept given just a little serving to hand from imply reversion.

Additional, with banks like Kotak Mahindra Financial institution and a few state-owned lenders exhibiting penchant for increasing their mortgage books, danger aversion within the sector might recede because the pandemic’s results fade. Because the proof of mortgage progress comes forth within the coming quarter and given the sturdy outlook for the Indian economic system, valuations can also see a re-rating because the 12 months progresses.

“Finally banks would be the winners within the capital markets,” Subramaniam added. That confidence can be put to check within the new 12 months.