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Watch out for two extremes when you invest in banking, NBFC stocks

Author: Kumar Shankar Roy/Wednesday, June 26, 2019/Categories: Exclusive

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Watch out for two extremes when you invest in banking, NBFC stocks

It’s an irony of sorts. Financial services sector comprising banks and NBFCs have been the apple of the eye for growth-seeking investors for quite some time. On TV or newspapers, every ‘guru’ has a piece of standard advice to retail investors: 'buy financials'. But one has to look closely or one may end up buying the ‘ba-ba black sheep’ of the sector. The two extremes in both banking and NBFC stocks were never this evident. In the same sector, there are stocks that hit the 52-week lows while rivals touched 52-week highs. It is not that this phenomenon is limited to private sector banks, or public sector banks, small or mid-sized lenders. Investors are treating firms differently even though they share the same sector. This is prevalent across the spectrum with NBFCs as general finance companies, housing finance companies and several other sectors. What the trend means that investors have to be doubly careful before buying stocks from the financial services domain.

YES or NO - Banks

Take a look at the banking space. YES Bank, one of the largest private sector lenders by market value, on June 21 was trading barely 10% away from its 52-week low. In the last one year, the banking stock has lost over 67% value. Credit agency Moody's put the company under review for a downgrade. Foreign brokerages have cut YES Bank’s price target on concerns over its relatively high exposure to lower-rated companies. The bank is undergoing a transformation phase under new boss Ravneet Gill after the Reserve Bank of India (RBI) disallowed a fresh term for Rana Kapoor.

IDBI Bank has its own problems in the share market. The stock is trading about 3% away from its 52-week low. The LIC-owned lender is under the RBI's Prompt Corrective Action framework (PCA) as it is burdened by net Non-Performing Assets (NPAs). The bank has been posting thousands of crores in losses for some quarters.

Banks like IndusInd Bank, South Indian Bank, Punjab & Sind Bank, Andhra Bank, and Central Bank are trading near 52-week lows. Usually, stocks trading near 52-week lows are lapped up by investors looking for bottom-fishing opportunities. But, investors should not adopt the same strategy for banks. There may be deeper problems because of which stock is unable to get out of the low trading zone. Bad loan concerns, management change, talk of a merger with bigger banks in case of PSU lenders are some of the reasons why banking stocks may be not doing well compared to its peers.

In the same sector, shares of some banks are flirting with their respective 52-week highs. Axis Bank stock, for instance, is barely 7% away from its peak level in the last one-year time frame. The bank has seen a successful management change and is slowly pulling itself together against challenges. PSU lender SBI is less than 5% away from its 52-week high. The state-run lender, the biggest bank in India, has managed the bad loan situation and despite its size has now slowed down like many others. Another PSU lender that has held its fort in the stock market is Canara Bank. Stocks of ICICI, HDFC Bank and Kotak Mahindra Bank have seen droves of investors picking their stocks, on hopes that these nimble-footed private sector lenders will lead when economic recovery happens. Even small comparatively smaller sized peers - Federal Bank, City Union Bank and DCB Bank - enjoy street confidence if you look at how their stocks trade close to their respective 52-week highs.

Shadow banks - Light or dark

Non-banking financial companies (NBFCs) have been Dalal Street's favourite whipping boy, of late. But, the divergence exists here as well. Despite what many may think, some NBFCs continue to enjoy premium valuation and standing in the market. Others languish. On July 5, the BJP 2.0 will present its Budget. The stress in the financial sector affecting non-banks is an issue that has been affecting for quite some time now. It all began with IL&FS defaults, then the DHFL issues and fund crunch in the NBFC sector. 

NBFCs with large exposure to capital markets have been facing investors’ ire. Geojit, Emkay and IIFL Finance are trading barely 3-6% away from their 52-week lows. Plus, housing finance companies are also finding it difficult to attract investors. Be it a retail loan or institutional loan provider, some NBFCs are trading close to their low reached in the last one year. Housing finance companies are now reeling under increasing capital requirement. On the other hand, banks stay away from lending money to NBFCs while mutual funds - which had become a mainstay for NBFC funding - are also being asked to de-risk themselves to too much sector exposure. The past eight months have been tough for HFCs, given that they have the highest ALM mismatches among NBFCs. Many companies have managed the situation by curbing disbursements, increasing sell-downs and diversifying borrowings sources. Unless the structural issues are resolved, things will likely remain bleak.

On the other end of the spectrum, NBFCs backed by strong parent groups or differentiated business models have managed to etch a niche for themselves. The ability to raise debt quickly in a difficult market is helping such NBFC stocks. Manappuram, Bajaj Finserv, Bajaj Finance, Aavas Financiers, HDFC, Can Fin Homes and LIC Housing are trading quite close to their 52-week highs. While the RBI has drawn up liquidity framework to help ailing NBFCs, some NBFCs do not require any help thanks to their financial position and strong parentage support. Automatically, such shadow banks are being preferred by investors. Though both the good and not-so-good NBFCs are present in a growing economy like India, investors are differentiating between two business models and scrutinizing for weaknesses. This shows the true benefit of good research before investing in any stock. 

Do remember that the lending disinclination toward NBFCs is continuing. There are still doubts considering the uncertainty prevailing among capital market lenders surrounding the credibility of rating agencies and the credit profile of NBFCs. At such times, investors should prefer NBFCs with decent promoter backing, superior asset-liability profile and stable asset quality. Merely, the stock price or valuation will not do the trick in terms of generating sustainable trading profit.  (The author is a senior journalist with 14 years of experience)

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1 comments on article "Watch out for two extremes when you invest in banking, NBFC stocks"

Dinesh

6/26/2019 7:51 PM

Its a very good article, time related. Some points/reasons could have been elaborated like volatility in INDUSIND....

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