Banking stocks have been under pressure in the past few weeks due to various factors such as rising bond yields, fiscal concerns, and FPI outflows. However, some experts believe that the banking sector is likely to witness a revival in the coming days, as the macroeconomic situation improves and the Budget provides some relief measures for the banks.
Rising bond yields a temporary challenge
One of the major reasons for the weakness in banking stocks has been the spike in bond yields, both in India and the US. Higher bond yields increase the cost of borrowing for the banks and also affect their treasury income. The US 10-year bond yield has risen to 4.95 per cent, while the Indian 10-year bond yield has climbed to 7.8 per cent.
However, some analysts believe that this is a temporary phenomenon and the bond yields will stabilize soon. They argue that the rise in bond yields is not due to monetary tightening, but due to fiscal expansion and higher inflation expectations. They also point out that the RBI has been supportive of the bond market by conducting open market operations and providing liquidity.
V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that the market responds to economic headwinds more than geopolitical tensions. He said that the sustained rise in US bond yields is becoming a major challenge for the US, and thereby for global markets. He said that the market had not positioned itself for the US 10-year bond yield at 4.95 per cent and, therefore, this unexpected spike in yields will take its toll on equity markets.
He said that it is important to understand that the spike in bond yields is not due to monetary factors alone. The fiscal situation characterised by high deficit in the US is also contributing to the rise in yields via increased supply of bonds. He said that this combination of fiscal and monetary factors pushing bond yields up will pose a major challenge to equity markets.
He said that FPIs will continue to sell, impacting the markets. However, he added that long-term investors can capitalise on the decline in banking stocks triggered by FPI selling, through a calibrated accumulation strategy. He said that this segment is doing well and the valuations are fair, even attractive.
Improving NPA situation and recapitalization prospects
Another factor that has been weighing on the banking stocks is the asset quality issue. The banking sector has been grappling with high non-performing assets (NPAs) for a long time, which have eroded their profitability and capital adequacy. The Covid-19 pandemic has further aggravated the situation, as many borrowers have faced stress and moratoriums.
However, there are signs of improvement in the NPA situation, as the economic recovery gathers pace and the restructuring schemes provide relief to the stressed sectors. The RBI has also announced various measures to ease the NPA recognition norms and provide incentives for the banks to lend to the priority sectors.
Moreover, there are expectations that the Budget will announce some measures to recapitalize the public sector banks, which are in dire need of capital infusion. The government may also initiate some consolidation and divestment plans for the PSBs, which will improve their efficiency and governance.
Devang Mehta, Senior VP & Head Equities Sales, Anand Rathi Securities, said that the banking space has grossly underperformed in the past few days. He said that if the economy is going to bounce back and if the markets are going to the levels maybe higher than 7,900-8,000, the banking sector would take the lead.
He said that the banking sector would be in action in the coming days, with the overall market consolidating and this space can give the market good support. He said that the private banking space would do well, especially ICICI Bank, HDFC Bank and Kotak Mahindra Bank. He also said that among the second rung stocks, Federal Bank and Karur Vysya Bank are available at good valuations.
Outlook and opportunities
The banking sector is one of the most important sectors for the economy, as it provides credit and financial services to various segments. The banking sector is also a proxy for the economic growth and development of the country. Therefore, any improvement in the banking sector will have a positive impact on the overall market sentiment and performance.
The banking sector is also one of the most diversified and competitive sectors in the market, with various players catering to different segments and niches. The banking sector offers a wide range of opportunities for the investors, depending on their risk appetite and return expectations.
The private sector banks are known for their superior asset quality, growth, and profitability. They have been gaining market share from the public sector banks, due to their better technology, customer service, and innovation. They also have a strong retail franchise, which provides them a stable and low-cost source of funds. The private sector banks are expected to benefit from the economic recovery, as they have exposure to the high-growth sectors such as retail, consumer, and SMEs.
The public sector banks are known for their large network, reach, and social obligation. They have been lagging behind the private sector banks, due to their high NPAs, low capital adequacy, and governance issues. However, they also have some advantages, such as their dominance in the rural and semi-urban areas, their exposure to the infrastructure and corporate sectors, and their support from the government. The public sector banks are expected to benefit from the recapitalization, consolidation, and divestment plans, which will improve their balance sheet, efficiency, and valuation.
The banking sector is poised for a rebound, as the macroeconomic situation improves and the Budget provides some relief measures for the banks. The investors can look for opportunities in the banking sector, depending on their risk-reward profile and time horizon.
