BNP Paribas sees further re-rating of banking stocks on better fundamentals

BNP Paribas India sees significant uptick in banking stocks in coming days on the back of expected earning upgrades from higher growth and lower credit costs.

With the banking sector stocks trading close to the mean price-to-book value, the re-rating of the sector should continue hereon, BNP Paribas said in a report, adding that both asset quality and balance sheet issues have now been largely addressed.

Bullish on four sectors

It sees positive surprise on both the economic growth and banks’ asset quality front in the coming days with housing, auto, agri and MSME sectors continuing to do well and demand expected to increase in the next six months. These four sectors account for at least 40 per cent of outstanding industry credit. For large banks, these sectors contribute 30-50 per cent of the outstanding loans.

The current pick-up in business momentum will not only sustain, but will get much better in the next two or three quarters, Avneesh Sukhija, Senior Analyst, BNP Paribas India told BusinessLine.

The heavy Covid-19 provisions made by banks in the first half of this fiscal should be sufficient for the incremental pandemic related slippages, he said. The actual slippages could be significantly lower than the provisions made in first half of this fiscal.

Better placed on credit cost

The excess provisions in the first half (if utilised) this fiscal are more than enough to take care of FY’21 credit cost, he said. The credit cost is now expected to normalise in the next two to three quarters, while it was earlier expected to normalise by FY’23.

“There could be significant uptick in banking stocks as they are going to benefit from earning upgrades due to higher growth and lower credit cost”, Sukhija said.

In the last 12 months, the Bank Nifty had underperformed the Nifty by 18 per cent, primarily due to asset quality, balance sheet and growth related issues.

“Overall, we expect a strong earnings season. We expect loan growth of our India financials coverage to moderate further, benefits of low cost of funds to be offset by higher deposit growth and credit cost to reduce given the improvement across sectors”, he said.

The report highlighted that BNP Paribas checks with industry participants across NCR, Mumbai, Kolkata, Chennai and Bangalore (together represented 44 per cent of India’s FY’20 GDP) indicate business momentum could pick up significantly in fourth quarter after softening marginally in December 2020.

Also, large corporates have started executing their Capex plans. and MFIs, commercial real estate, hospitality and mining segments look poised to recover as well, the report added.