NEW DELHI : Following a strong performance in the most recent quarter and promising prospects at a time when interest rates are rising, securities market analysts have turned their attention to banking stocks.
At a time companies within the manufacturing sector have struggled, the banking sector has stood out, cushioning India Inc.’s overall earnings performance. Stocks in the banking, financial services, and insurance (BFSI) sector accounted for about half of the incremental earnings growth in Q4FY22, according to analysts at Motilal Oswal Financial Services, thanks to a slight rebound in loan growth and improving asset quality trends. The worst days of asset quality difficulties are behind banks, and credit costs are expected to drop dramatically. Further, much of the economic slowdown is additionally behind, and analysts expect to work out the economy recovering, fueling loan growth. Higher rates are considered to be positive for banks.
“Banks are our favoured option for FY23,” said Nitin Bhasin, head of research at Ambit Institutional Equities. Valuations are relatively inexpensive, and asset quality has improved significantly, moderately in credit cost and NPAs”. As real yields rise, Bank Nifty has outperformed Nifty, according to analysts. Also, because the yield curve moderates, a bit of capital loans would shift back to banks from commercial papers, Bhasin said.
“Our stance has not changed, and private banks in particular continue to appeal to us,” said Pratik Gupta, CEO of Kotak Institutional Equities. Lower credit costs across industries and improved loan growth, according to analysts, drove the good Q4 result. The tailwinds for financials remain robust, analysts said. Among others, telecom and insurance remain preferred bets. Telcos are better placed and not impacted by an economic downturn locally, or by a worldwide hike in rates.
According to Kotak’s Gupta, who also loves insurance companies, telecom remains one of the defensive choices. The insurance sector is anticipated to work out growth memorizing another time while the valuations have come off quite sharply for lots of these insurance companies, making them attractive bets. For IT companies, analysts’ views remain mixed. The economic slowdown in the United States and Europe may have an impact for IT earnings, making analysts apprehensive. Moderation is predicted in S&P500 revenue growth to 5 year-on-year in CY23 from 15% in CY21, which spells caution feels Bhasin. Meanwhile, the opening-up of the economy after covid-led restrictions keeps multiplexes, retail, and hospitality well-placed to figure out earnings growth
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