Bank index in the last 1yr has underperformed with 2.9% returns. However, the earnings have grown about 28% on a Y-o-Y basis until Oct 23.

Are the returns justifying the trends which we are seeing in the Banking & Financial Services space?

Points in favour

1.     Macro: One of the best ways to participate in India’s growth trajectory is to invest in the BFSI space. In the last 15 years, BFSI has grown at a faster pace than the Indian Economy. While India’s Nominal GDP grew by 12.1%, within the BFSI segments the growth has been Banks: 12.6%, NBFCs: 16.7%, Mutual Funds: 14.7%, General Insurance: 15.3% & Credit Cards: 15.6%.

2.     Credit Growth: The Current Bank’s Credit Growth rate is at an all-time high at almost 20%.

3.     Credit Quality: Performing Assets (NPAs) are at a decadal low. This gives a great boost to the credit quality and thereby the earnings of Bank and NBFCs.

4.     Increased Repo rates: Due to RBI rate changes, Banks & and NBFCs will be able to pass on the rate increase in the loans disbursed, boosting their NIMs

Points not in favour

1.     Lowering of NIMs for Medium to Smaller banks going forward: Margins are supposed to be impacted going forward on account of the increase in the deposit rates. This will have an impact on the earnings of the smaller banks. While the larger banks will not be significantly impacted due to the higher CASA (Current & Savings Bank balances) ratios.

2.     Recent RBI increase risk-weights on certain retail loans: Larger banks will not be materially impacted due to this change whereas the cost of capital will increase for the NBFCs disbursing retail personal loans.

What is MIRA Money’s view?

1.     Each sector is assessed objectively based on three key parameters

a.     Value – Looks attractive (more on valuations mentioned below)

b.     Earning capabilities – Forward earnings looking very healthy due to increasing credit and deposit growth along with decadal NPAs

c.      Macro analysis – No major concerns as we are at the fag end of the rate hikes

2.     More on Valuation

a.     Currently Bank index is trading at a PE & PB of 15 and 2.55 respectively. Whereas the long-term average is about 18 and 2.68. Compared to Forward PE, the Banking and financial services sector looks attractive

b.     As per the graph below, Nifty Financial Services' performance relative to Nifty 50 is at a level last seen during the Global Financial Crisis (GFC) in 2008 / 09.

c.      Recovery post-GFC has been stronger for the Bank Index

In summary, we expect the Banking and financial services sector to show a healthy momentum