CATALYSTS FOR IMPROVEMENT

Better quality of assets, lower operating costs, higher margins and sustained higher growth in income (led by credit growth) should help banks get re-rated further

The banking and financial services sector has gone through tough times over the last two years. Starting with the IL&FS credit crisis and the covid-19-led stress, the banking and financial sector stocks were hammered badly.

S&P BSE BANKEX had crashed from 36,961 in January ’20 to a low of 19,900 by May ’20. Moreover, market capitalization erosion for listed banks in the January to March period of 2020 was a staggering ₹9 trillion with the four biggest players - ICICI Bank, HDFC Bank, SBI and Kotak Mahindra Bank. All these banks saw ₹1 trillion each of their market cap being wiped out.

Banking stocks have made a swift recovery. But even after two-and-a-half years, BSE Bankex at 48,915 is offering good value considering that the sector and many stocks within the sector continue to trade at historic lows.

WHAT CAUSED SENTIMENTS AND VALUATIONS TO ERODE

Due to covid-19 there was an increase in the erosion of asset quality in the Indian banking space. In fact, large borrower accounts (with an exposure of ₹5 crore and above) constituted 79.8% of the NPAs and 53.7% of the total loans at the end of September ’20.

According to a market report, the impact of covid-19 has resulted in an additional debt of ₹1,67,000 crore due to the top 500 debt-heavy private sector borrowers turning delinquent between CY20 and CY22. This is over and above the ₹2,54,000 crore anticipated prior to the onset of the pandemic.

On top of this credit growth plunged to a multi-year low owing to the slump in the industry and the economy, thus hammering the prospects of the Indian banking system and its valuations.