Sector Update - Banking and Financial Services - ICICI Direct

The Q2FY21 performance and management commentary calmed the nerves on the banking sector on the back of a steady performance. The collections trend saw a considerable improvement while initial commentary from management, industry data suggests the quantum of restructuring would be lower than anticipated earlier. Outstanding contingency buffer seems to be adequate to take care of incremental stress thereby safeguarding any adverse impact on earnings trajectory. Led by home, auto loans, ECLGS, disbursement are touching pre-Covid levels with further improvement expected ahead. This has been reflected on the Bank Nifty as well wherein after underperformance of ~19% in March-September 2020, the index have revived outperforming the Nifty by ~22% from September till date.

Given optimism creeping in over a faster-than-expected revival, mixed with caution over the actual outcome in the coming quarter for restructuring, we expect the stock price of lenders (banks, NBFCs) to remain slightly volatile in the near term. However, we continue to expect the positive impact of structural changes undertaken in the long run. Improving repayment rates, collection efficiencies and credit offtake seem promising. Restructuring is seen at 2-5% of advances with private banks relatively better. We prefer large private banks given adequate capital and liquidity which makes them well paced to garner incremental market share. Contingency buffer enables safeguarding against hiccups in asset quality. However, recent sharp run up in stocks could keep near term movement in a range until further clarity emerges. Therefore, we recommend Axis Bank and IDFC First Bank among banks and SBI Life among non-lenders. Large NBFCs could remain beneficiaries of recent working paper pertaining to new banking license.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_Banking_SectorReport_Dec20.pdf

Source : Equity Bulls

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