Banking stocks could outperform markets in CY2021

By Urvashi Valecha

Banking and financial services stocks underperformed the benchmarks in calendar year 2020, with Bank Nifty delivering a negative return of 2.8%, against Nifty’s 14.9%. This could change this year as the banking sector is set to witness a re-rating on account of improving economic outlook and the focus on growth and profitability. Market experts believe that the Nifty Bank could outperform the markets in 2021.

After the Budget, the Nifty Bank has rallied by 17.96%, which is ahead of the Nifty’s rise of 10.8%. So far in 2021, the Nifty Bank has risen 15.3%, whereas the Nifty has grown by 8.1%. On the other hand, the Nifty has risen 22.3% from its last high in January, but the Nifty Bank is up by only 12.2% during the same period.

Experts believe that the banking stocks will continue to outperform as the banking sector is at the beginning of an earnings upgrade cycle. Banking sector’s earnings are expected to swell in CY2021 on the back of higher growth in credit, which is slated to improve as the GDP would grow at 14.4% in FY22, according to Budget estimates.

Moreover, the government’s increasing allocation towards capital expenditure and the proposal to create a ‘bad bank’, along with an anticipated surge in corporate capex, have helped improve the outlook for banks.

Lalitabh Shrivastawa, AVP- research, Sharekhan by BNP Paribas, said, “Primarily, the Q3 performance and management commentary indicate an improved visibility on the asset quality outlook for most private banks. The upfronting of provisions and limited restructuring pipeline is reassuring, and going forward we expect the focus of banks to revert to growth and profitability.” Furthermore, most large private banks are already sitting on good capital adequacy which will incentivise them to lend.

According to experts, improved demand in corporate lending, aided by improvement in the economy, will aid growth, and will be looked at as positive triggers for banking stocks. Rusmik Oza, executive vice president, head of fundamental research, Kotak Securities, believes that banking stocks could see a massive outperformance in 2021. He said, “If the Nifty Bank index has to touch its previous peak forward price to book value, there is another 22% upside left in it at a time when Nifty-50 price to book value is already 11% above its previous peak.”

According to Kotak Securities, one should have higher allocation towards the sector since the weight of banks in Nifty-50 is 28% and BFSI’s is 40%. This means one needs to have more than 30% weight in the banking sector in one’s portfolio to have meaningful outperformance over Nifty-50.