NEW DELHI : Stocks of banking companies have emerged as top picks for equity analysts, following their show in sterling in the quarter just ended, and bright prospects in an era of rising interest rates.
At a time when companies in the manufacturing sector struggled, the banking sector stood out, dampening the overall earnings performance of India Inc. More than half of the incremental earnings growth in Q4FY22 was driven by banking, financial services and insurance (BFSI) stocks, on the back of a modest pickup in credit growth and improving asset quality trends, analysts at Motilal Oswal Financial Services said.
For banks, the worst days of asset quality issues are behind us and credit costs are expected to fall quite sharply. Moreover, much of the economic slowdown is also behind, and analysts expect to see the economy recover, fueling loan growth. Higher rates are also considered positive for banks.
Nitin Bhasin, head of research at Ambit Institutional Equities, said: “Banks are our preferred bet for FY23. Valuations are relatively inexpensive and asset quality has improved significantly, with cost moderating. credit and NPAs”.
Bank Nifty has outperformed Nifty as real yields rise, analysts say. As yields tighten or inflation eases, that can cause banks to outperform, Bhasin said, adding credit growth hit double digits after 30 months. Also, as the yield curve flattens, some of the working capital lending would flow back to banks from commercial paper, Bhasin said.
“Our view hasn’t changed, and private banks in particular still look good to us,” said Pratik Gupta, CEO and co-director of Kotak Institutional Equities.
Analysts said the strong fourth quarter performance was driven by lower credit costs across all sectors and improved loan growth. Tailwinds for financials remain strong, analysts say.
Among others, telecoms and insurance remain privileged bets. Telcos are better positioned and unaffected by a local economic downturn or a global price hike.
Telecom remains among the defensive plays according to Kotak’s Gupta, who also likes insurance companies.
The insurance sector is expected to experience a resumption of growth as valuations have fallen sharply for many of these life insurance companies, making them attractive bets.
For IT companies, analysts’ opinions remain mixed. The economic slowdown in the United States and Europe may impact the earnings of IT companies, prompting analysts to be cautious.
Additionally, Ambit’s Bhasin says valuations are still expensive. For Tier 1 companies, revenue growth is closely tied to S&P500 revenue growth. Moderation is expected in S&P500 revenue growth to 5% year-on-year in CY23 from 15% in CY21, prompting caution, Bhasin believes.
Meanwhile, the opening up of the economy after covid restrictions keeps multiplexes, retail and hospitality well positioned to see profit growth