BFSI Goes Bigger By The Day

• The cloud managed services market was valued at $36.47 billion in 2020 and is expected to reach $88.85 billion by 2026, at a CAGR of 16%. The BFSI sector, a pioneer in the adoption of computer and networking systems to curtail large, space-intensive repositories and databases, is expected to have a substantial share in the cloud managed services market.
• The BFSI sector will soon need a more polished workforce to retain the digital transformation momentum. The sector promises to bring 1.6 million jobs by 2022.
• FIIs invested $1.96 billion in banking and financial stocks in February, which accounts for 50% of the total inflows.
• The Insurance sector gained recently after the sector saw a surge in February numbers with shares of SBI Life and HDFC Life rallying to their record highs.
• The Indian BFSI sector listed around 27 IPOs between 2007 and 2020. Around 13 companies are expected to go public this year. The most high-ticket listings for 2021 will be LIC, Star Health Insurance, Reliance General Insurance, National Stock Exchange, Fino Payments Bank, and the PNB MetLife Insurance.
• Other likely IPOs of 2021 would include Aadhar Housing Finance, ESAF Small Finance Bank, AnandRathi Wealth Management, National Insurance Company, HDB Financial Services, and Arohan Financial Services.

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When most things ran into choppy waters during the pandemic last year, a clutch of stocks stayed afloat, rather set sail to greener shores.

The stocks from the banking, financial services and insurance sector, clubbed together as BFSI, outperformed the broader equity universe. With enough fuel still left in them, the momentum is likely to continue for the near to medium term as well.

“Nifty and Bank Nifty have been partners in crime for more than a decade and it was hard to imagine Nifty going up or down without contribution from Bank Nifty,” says Rahul Sharma, who heads the technical and derivatives research wing at JM Financial Services. “We must remember that banking stocks have a major share in Nifty 50 and have strong fundamentals.”

The early days of Covid-19 containment measures that had stalled all economic activities across large parts of the world, had taken a toll on the BFSI stocks. But after the initial earnings downgrade, the sector witnessed a steady revival on the back of improving asset quality trends. The stocks garnered good income in the recent months, while credit growth too has been showing signs of recovery.

It’s intriguing to see the BFSI stocks duck the downturn after the pandemic struck. The banking sector has shown a high degree resilience supported by adequate policy and regulatory measures. “The banking sector is expected to outperform most of its peers from here onwards,” says Nitin Agarwal, who is a banking analyst for institutional equities at Motilal Oswal Financial Services Limited (MOFSL).

Experts believe a pick-up in credit growth in the near term as the economy is likely to grow in double digits in 2021-22. Vinay Khattar, the research head at Edelweiss Wealth Management, expects banks to become even bigger and notes that large private sector banks and SBI have weathered the Covid crisis relatively well. The pick-up in credit growth, coupled with an accelerating provisioning cycle for non-performing assets, would lead to healthy profitability over the next few quarters.

MOFSL estimates suggest that banking sector earnings will gain a traction by the financial year 2022-23, driving significant improvement in the return on earnings (RoEs). This will support sustained performance of these stocks over the next few years.

The third-quarter earnings for the banking stocks have surpassed estimates, fuelling hopes for a higher mop-up in the last quarter. The industry is also evolving with many corporates like Marico diversifying into the financial arena and public sector banks narrowing down their bad debt loads.

Studies on the relative performance of the BFSI pack show that bulls have geared up for charging. Rahul Sharma, Head of Technical and Derivatives Research at JM Financial Services, points out that while the Nifty has gone up by more than 20 per cent from the highs achieved in January 2020, the BFSI pack has lagged behind with the Bank Nifty performing at 9 per cent and Fin Nifty – an NSE Index to reflect the behaviour and performances of financial markets including banks, financial institutions and insurance – at 12 per cent.

Experts are bullish on Bank Nifty and feel that it has an appreciation potential of 33 per cent within six months. “Bank Nifty is a clear buy in every dip. We are in a bull market and hence buying on dips will only work,” says Kishor Ostwal, Managing Director at CNI Research.

Not only the Nifty is performing well, it has also provided meaningful corrections through the last two months. “Both the Nifty Indices are placed well for a rebound,” Sharma says. “Use the volatility in the current market scenario for a buy on dip strategy. Stay long, strong and bullish on the BFSI stocks.”

Private banks and SBI account for approximately 85 per cent of the weight in Bank Nifty. A robust performance by these heavyweights is expected to drive Bank Nifty to outperform Nifty by at least 6-8 per cent in the near term. Bank Nifty has a potential target of 50,000 points within the next six months, translating a 33 per cent rise, according to experts.

“Public sector banks will be the growth engine for the BFSI sector as they have come out of their long-term underperformance,” says Sharma, of JM Financial Services. Analysts point to a mega shift in PSU banks in price and volume action which should bode well for the investor.

Some private bank stocks, too, have caught the attention of experts for the medium term. “We are positive on select private banks like ICICI Bank and Axis Bank, which have more room for a valuation re-rating, for the medium term,” says Khattar, of Edelweiss Wealth Management.

Banks, especially the public sector lenders, have come to the fore riding on their success in managing the bad debt which has been, for years, a major hurdle for the stocks to surge. This time around, experts feel that markets have even factored in this hurdle. Add to this the excess provisioning by the private sector as a cautionary stance. Markets have factored in improvement in asset quality over the next 18 months.

“Lower NPAs and subsequent recovery in bad debt were the reason for a sharp recovery in the Bank Nifty,” says Ostwal. There was, however, a spurt in non-performing assets during the Covid lockdowns. But the government handled the woes by creating a bad bank to hold all these bad loans. “In fact the investor’s money is shifting from private banks to public banks,” he says.

Real estate, which had been in the red for a long span of time, has begun reviving. A spurt in housing demand is breathing life into residential realty and consequently spawning hopes for housing finance companies and home loan lenders. Green shoots have started emerging in the automobile sector, which had hit its nadir over the last two years of steady downhill drive. Revival in automobile is also a huge boost for bank lending. Government’s push for infrastructure augurs well for the commercial vehicle space and social distancing norms have fuelled demand for passenger vehicles.

The writer is a financial journalist