The Sensex has recovered smartly from the March lows and is now just 10% away from its all time high. However, some sectors, like financial services, are still in the doldrums. For instance, the Nifty private bank and PSU bank indices are still down by 34% and 53% respectively from their peak.
Should investors rush in to buy because these stocks are going cheap? No, say experts. “Most stocks from the finance space are now quoting at lower prices for a valid reason and the moratorium related uncertainty is the immediate trigger that is keeping the stocks under pressure,” says Sujan Hajra, Chief Economist and ED, Anand Rathi Shares & Stock Brokers.
The Nifty bank indices are down
Due to low valuations, investors can consider large PSU banks.
The general moratorium ended on 31 August and finance companies are still in the process of taking stock. RBI has allowed finance companies to extend the moratorium up to two years for specific borrowers. “While the initial agreement between the bank and borrowers who need extension may happen now, the restructuring agreement may happen only by December,” says Hajra. This means the uncertainty on this front will continue for some more time.
“So far, there is no clear indication about how the moratorium or debt restructuring is being implemented. While banks will make provisions in the second quarter also, we won’t be able to assess whether it will be sufficient or not,” says Deepak Jasani, Head of Retail Research, HDFC Securities.
Lenders are also worried about the slow opening up of the economy and its impact on non performing assets (NPAs). “There is no clarity about the extent and timing of recovery because several sectors are still under lockdown and the possibility of NPA may increase if complete lockdown lifting gets delayed. We can make an informed decision about recovery only 3-4 months after the lockdown is fully lifted,” says Jasani.
Some BFSI stocks still worth considering
Investors should focus on companies that are expected to do well and are quoting at reasonable valuations.
However, everything is not lost because banks are taking proactive steps to fight the situation. “Banks are bringing down their deposit rates faster than lending rates and this will improve their margins,” says Hajra. Investments by banks in government bonds now are much more than the requirements and therefore, they should be able to report mark to market gains on them. Restructuring and two- year extension of moratorium will also reduce the NPA pressure, at least in the short term. That means the fall in net profit at banks may not be very big.
The big question is, have these negatives already been priced in? If yes, should investors start bottom fishing and use the current low prices to invest in selective stocks? “Due to intermittent small rallies and sell offs, there will be opportunities for traders.
However, it is better for long term investors to wait. If you want to get in now, make sure that your risk appetite is high and you have enough patience to withstand high volatility,” says Jasani.
If you want to enter, make sure you split the finance space into sub categories and treat each part separately. While the fundbased companies like banks and NBFCs are reeling under NPA problems, the non fund based ones are doing reasonably well. “Non fund based companies, like AMCs, are better placed. Investors should be selective about fund based firms,” says Hajra.
Since private sector banks continued to corner market share from public sector banks during this turmoil, they are expected to come out stronger. However, the current high valuations means that the same is already priced in. However, large PSU bank like SBI will be able to come out of this turmoil and is now quoting at reasonable valuations.
Retail housing finance is a relatively safe segment now and worth considering. However, the situation here is similar to that of banks. While private entities are quoting at high valuations, companies like LIC Housing Finance are quoting at reasonable valuations.
One set of fund-based companies—gold loan companies—are not facing any NPA issues. The ongoing ecoonomic turmoil is working in favour of companies like Muthoot Finance and Manappuram Finance because businesses starved for funds are shifting to them for immediate loans.