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Why are bank stocks underperforming?

NEW DELHI: Fortunes of bank stock are said to be intertwined with the economy, growing in tandem and falling in sync. However, recent trends seem confusing. Bank stocks have fallen despite the Indian economy showing some recovery signs.

The Nifty Bank index, comprising 12 bank stocks, has fallen over 8 per cent in the last one month. It has delivered a negative 1.5 per cent in three months and is up just 1.5 per cent in the last six months. In comparison, the Nifty has fallen 3 per cent in one month, 1 per cent in three months and is up nearly 10 per cent in the last six months. In the long-term, the NSE bank index has underperformed the Nifty50 by 19% since February 2020, before the pandemic began.

Punters on Dalal Street have highlighted various “technical” reasons for the underperformance, including extant overweight positions of institutional investors and selling by foreign portfolio investors (FPIs). In fact, bank stocks constitute the largest holding for FPIs and recently they have been selling loads of it.

But some analysts say there is not much substance behind the underperformance but just a narrative that may not have much correlation with facts. “The underperformance of banks reflects the global narrative of incumbent banks being ill-prepared in the emerging environment versus fintechs and big techs,” says Sanjeev Prasad of Kotak Securities. “The market has extrapolated the success of fintechs in payment to lending too. There are two issues with this narrative in the Indian context; one, standalone payment business is not very remunerative, and two, the lending space is already quite crowded where fintechs have no real advantage in lending.”

The emergence of new-age fintech firms have made many nervous, especially after these institutions also ventured into lending. Investors and businessmen say that they may disrupt the lending business, like how buying and paying for groceries and clothes have changed.

The point to be noted is payment companies in developed markets have largely focused on payment with a limited foray into lending with buy-now-pay-later schemes. The Indian payment industry does not appear to be very profitable given a large number of payment options, reluctance of consumers to pay for transactions alone, very low switching costs for consumers and high costs for merchants.

On the other hand, lending is a different ballgame that incumbents will defend more vigorously, unlike payments. “Lending fintechs have largely focused on subprime borrowers (personal unsecured loans) given the plethora of options for prime and super-prime borrowers. This strategy entails its own risks for fintechs with limited datasets on borrowers and riskier profile of borrowers; a Covid-19-type situation would result in a spike in credit costs,” says Prasad.

So, in short, banks are not going out of business.

Add to it the improving health of traditional lenders. Analysts expect a sharp increase in profits and return ratios for banks as provisions lag growth in net interest income and pre-provisioning operating profits.

Thus, they have bullish targets for banks. The median 12-month potential upside for largecap banks is as high as 44 per cent. IndusInd Bank, Axis Bank, HDFC Bank, SBI and ICICI Bank are among the top picks from the sector.

“Bank stocks are waiting to re-rate and the moment you see FII selling coming down, one fine day, you might just see some of the large banks also moving up by like 5-7 per cent in a day. I am quite bullish on the banks,” says Mahesh Nandurkar of Jefferies in an interview with ET Now.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services also says the underperformance of banking stocks is bound to change since asset quality concerns have receded and credit growth is picking up. “So, investors can utilise this correction to buy high quality banking stocks,” he adds.

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