It Is Private Banks -Once More!
It Is Private Banks -Once More!Banking sector is one sector that truly captures India’s growth story. The banking index, in spite of recent challenges faced by the banking sector is amongst the best performing sectoral indices.Yogesh Supekar along with Karan Bhojwani track the banking sector performance and share its outlook, going forward.
Will it surprise you to know that the top 50 companies by market cap have attracted nearly 77 per cent of the total domestic institutional investments (June 2018 to June 2019) even as foreign institutions have 63 per cent of their investments in these same companies.
What may come as a surprise for a few investors is the fact that private banks have dominated this list of 50 companies. Indeed, MF holdings in private banks have hit record highs. The weight of private banks in MF portfolios rose to a record high of 20.8 per cent in September 2019. HDFC Bank and ICICI Bank are the biggest beneficiaries in this process of concentrated investments by both domestic funds and FIIs. HDFC Bank and ICICI Bank alone constitute 5-11 per cent of the total equity assets of major mutual funds.
Why such craze for private banks in India? Why such attraction for banking sector and stocks – one may ask? Let’s start by understanding the basic fact that the banking sector is synonymous with the Indian growth story. Banking stocks are not only investors' favourites but are meant for all seasons. If one takes a look at some of the best performing sectors in India over the past 10 odd years, the banking sector along with FMCG and IT sectors has created huge amount of wealth for investors. In fact, Nifty Bank has outperformed and has been a lead sector performer compared to broader indices across all time frames. The profits are estimated to rise for banks owing to NPAs bottoming out and various corrective steps having been taken by the government. Betting on banks is like betting on the India growth story to the core. If you were looking for a sector to tap growth opportunity in rural India, consumption growth story in India as well as want to exploit the benefits of digitisation in new India- you need not look beyond the banking sector in India for investments.
Government steps taken to support Banks :-
Liquidity infusion
Corporate tax cut \
PSU bank consolidation and recapitalization
Performance of Banks
Private banks once again have proved to be more efficient, more profitable, growth oriented and wealth creating ones. The below table distinguishes the average performance of private banks and public sector banks.
We can see that the net NPAs for PSU banks is more than double that of private banks. The returns over one year, three years and five years are inferior for public sector banks when compared to private sector banks.
Ritesh Ashar
Chief Strategy Officer (CSO), KIFS Trade Capital Pvt. Ltd
If we look on quantitative grounds, among public sector banks State Bank of India (SBI) has posted 218 percent of standalone net profit compared to the same quarter last year while fresh slippages halved to Rs8,800 crore from Rs16,000 crore on a quarterly basis. An improvement in asset quality by 34 bpwe look on quantitative grounds, among public sector banks State Bank of India (SBI) has posted 218 percent of standalones YoY was observed while improvement was visible in net interest income (NII) by 17.67% compared to the same quarter last year. The private sector giant which contributes 10.87 percent to the Nifty, posted a net profit of 26.8 percent YoY. The NII rose by 15 per cent, while the NPA stood at 0.42 per cent from 0.43 per cent. This shows that the overall banking sector is under distress, but the measures and actions taken by the RBI are visible in current numbers. However, there is still room left for further improvements. Also, this will result in elimination of weak banks and contribute in creating a stronger and better structured system.
Even though the Bankex has been outperforming the Sensex consistently, not all banks have proven to be wealth creators. The challenge faced by a majority of investors is to identify which banks to invest in and which ones to avoid. Also, one of the most interesting questions that any investor needs to ask himself is – how to build a portfolio of quality banks that are long term wealth accretive?
Says, Amruta Renavikar, who has successfully built a portfolio of banking stocks over several years, “In my initial investing years, I always struggled to identify the better performing stocks in advance. Quickly I learnt that it is almost impossible to pick stocks with 100 per cent accuracy. I started investing in ‘Banking ETF’ as I was not sure which bank stock to buy. I did that because I was confident about the sector, although I was not so sure which banks will outperform the other banks. Also I was impressed with the fact that by buying banking ETF, I am simply able to buy all the underlying banks in certain fixed proportions (weightages). Thanks to my decision I am now sitting on 20 per cent gains in one year when most of my investor friends are struggling to generate positive returns. In my view, buying a Banking ETF is the best way to take exposure to the banking sector in India.”
Banking ETF can be one of the better ways to participate in the banking growth story.
A Balasubramaniam
MD & CEO, Aditya Birla Sun Life AMC Limited.
Why do you think investors should invest in Banking ETF?
The banking and financial services sector forms a significant proportion of the Indian market cap and this sector can be considered as a proxy to the Indian economy.
Also given the role, the sector is playing in channelling the savings to the Indian economy in the form of lending both to retail and MSME sectors, the sector carries higher importance in the Indian economy.
On the basis of these factors Banking ETF provides an opportunity to investors to choose these indices in order to have direct exposure to this sector through the ETF route.
Is exposure (investing) to banking ETF the best way to participate in the 'banking growth story' of India?
A Banking ETF is definitely one of the best ways to participate in the banking growth story in India. If you are bullish on India, you have to be bullish on the banking sector. Other than that, there are also equity mutual funds that can enable investors to participate in the sector.
How to evaluate good Banking ETFs?
Frankly, Banking ETF does reflect purely the stocks that are already on the index and the ETF is nothing but reflection of the underlying stocks. Investing via ETF provides an opportunity to buy the units during the market hours at the price prevailing during the market time and hence it becomes one of the options to invest in the Banking sector
Manav Chopra
CMT, Head Research - Equity, Indiabulls Ventures Ltd.
Bank Nifty has been facing resistance at the upper boundary of a short term channel. Once this zone is breached on the upside banknifty is likely to witness strong upward momentum and is likely to breach the swing high of 30,800 and head towards testing its all-time highs of 31,780. Traders should look to buy on a breakout as the up move is likely to be sharp on the upside. Near term support is placed at 29,700.
Support : 29,700-29,500
Resistance : 30,400-30,800
Technical perspective: Bank Nifty
Nifty Bank, the major sectoral index, is 4.56 per cent short from its lifetime highs. With the recent corporate tax cut announcement, the index rose by 15 per cent in just two trading sessions. Later, it surrendered 3,233 points or 10.5 per cent of the 4,158 points rise in 14 trading sessions. Unlike the Nifty, Nifty Bank is unable to retrace the 100% of this fall. It is facing stiff resistance in the zone of 30800-30600 and forming indecisive patterns, such as Spinning tops on the daily time scale. If we look at the broader picture, the Nifty Bank is clearly in an uptrend, as it formed significantly higher lows on longer time-frame charts. It is trading above the short term and long term moving averages and meeting all rules of Daryl Guppy’s GAMMA setup, a combination of 12 different moving averages. The long term 40-week average is trending up. The index has overcome the resistance of a 30-week average and is currently trading just above it. The short term 10-week average has also turned up. Among the momentum indicators, the 14-period weekly RSI is currently quoting at 57.74 and is trading above its 9-day average. The stochastic oscillator’s %K moved above the prior swing high and above the %D. Moreover, the daily MACD stays bullish as it is trading above its zero line. Going ahead, the immediate resistance is in the zone of 30800-30600; any sustainable move above 30800 is likely to open up gates for a further rally towards the levels of Rs31,660. If the recent swing low is protected, the Nifty Bank will surge towards 34,100 levels within the next one year.
SBI can be a net beneficiary of RBI’s external benchmarking mechanism
The mandatory external benchmarking of lending rates from the coming month for fresh retail and MSME loans would likely weigh on margins of the banks, if not mitigated through a commensurate reduction in the rates on deposits. The latter could be challenging, particularly, for private banks which are growing at a faster pace given their stronger capital position and are also operating with a stretched loan/deposit ratio.
SBI, Bank of Baroda and some other PSU banks who have already announced retail products linked to the repo rate or other external benchmarks are now offering home and auto loans at rates 20-30bps cheaper than before. The competitive landscape would be shaped by how aggressively these products are marketed, given that they carry lower margins. But it is more likely that large private banks and HFCs who have overlapping customer segments (salaried and borrowers with high credit score) may have to choose between protecting margins or loan growth, till there is systemic improvement in the deposit mobilization.
SBI having the stickiest deposit base, has significant headroom for improving the C/D ratio and a strong balance sheet could witness a favourable trade-off of gaining meaningful market share with little margin sacrifice.
Yes securities
Small Finance Banks
Small finance banks have had a mixed year with AU Small Finance Bank and Ujjivan Financial services outperforming the broader markets and Equitas underperforming. Overall, the small finance banks managed to grow satisfactorily amidst the liquidity crisis.
HDFC Bank has emerged as the largest market cap gainer among global banks with an increase of $25 bn in a year.
Bloomberg
Rajeev Yadav,,
MD & CEO, Fincare Small Finance Bank.
How are the recent development in the financial sector impacting your business?
Despite the cyclical downturn in current market conditions, Fincare has been able to sustain its growth momentum. As a small finance bank, a large share of our portfolio comes from the micro loans business. India is the largest micro finance market in the world, and although restricted to simple, unsophisticated loans, the sector has thrived, with loans given to millions of unbanked citizens. Our retail business offers a wide range of products covering the entire gamut of credit, savings, insurance and payment needs. We have opened 71 new branches in the last fiscal.
How is the outlook for small finance banks in India? What are the growth challenges faced by the small finance banks?
By addressing financial needs and aspirations of low-income and rural Indians in a comprehensive manner, small finance banks influence how India's broader financial sector thinks about financial inclusion. The opportunity size is fairly large and distributed.
However, the business comes with its set of challenges as well. The challenges include susceptibility of income to natural disruptions such as floods, building a low cost liability portfolio, quick adoption of technology etc.
What are the new developments that work in favour of small finance banks?
With strong emphasis on good corporate governance, highquality lending and low-cost structures, the small finance bank model is on the path of scalability and sustainability. SFBs have also established themselves as beacon points of financial inclusion in the country, reaching the large under served population by providing both asset and liability solutions through high technology-low cost operations.
Conclusion
In spite of the challenges faced by the sector, the banking sector in India has seen more consistency in terms of growth. The banking sector, apart from being the lifeline of any economy, can act as a lead indicator of the broader market.
Historically speaking, the banking sector rebounds earliest in case of turnarounds. So, do not be surprised if you see leadership coming from banks if the markets recovery continues in 2020.
Even though the valuations look attractive for several PSU banks, it is private banks that may turn out to be actual wealth creators in the long run. Private banks have a weight of 26.8 per cent and 21.6 per cent in the Nifty and the BSE 200 respectively. Already a set of private banks is dominating the market mood favorably and the trend promises to continue in same direction.
Investors are thus advised to have a skewed allocation towards private banks while constructing a diversified portfolio.
A healthy allocation in the overall portfolio to banks is warranted at this point of time. Taking exposure through a sectoral banking fund or a banking ETF may also be a good idea.
Methodology
Banks are ranked on comprehensive financial parameters. The financial performances are grouped in four major categories namely size, growth, efficiency and asset quality. Again these major categories are subdivided into different financial parameters.
While considering size we have subdivided it into size of total assets of the bank, total income, operating profit and net profit. For growth we have considered CAGR in net interest income, operating profit, net profit and balance sheet size of last three years ending FY19. The consolidated efficiency is calculated by taking into account total advance to deposit ratio of latest year, profit per employee, and business per employee and finally return on asset. For asset quality we have taken Net NPA as % to Net Advances (FY19). All the individual parameters are given appropriate weightage to arrive at final ranking.