Foreign portfolio investors (FPIs) have pulled out close to ₹11,000 crore from the financial services sector stocks in July amid concerns over the spike in fresh slippages and asset quality deterioration from the key sector constituents — banks and NBFCs.

According to NSDL data, FPIs pulled out ₹10,767 crore from the financial services sector in July. Of the same, ₹7,341 crore was pulled out from banks while the remaining ₹3,426 crore outflow was from ‘Other financial services’ which includes NBFCs and financial institutions (FIs). The outflow from the financial sector accounts for 95 per cent of the overall FPI outflow during the month across 35 sectors.

“The banking index has been underperforming on concerns of asset quality deterioration. The 6-month Nifty Bank return is only 0.43 per cent while the 6-month Nifty return is 8.8 per cent This under-performance has been largely due to the poor performance of HDFC Bank and Kotak Bank. These two were FIIs’ favourites,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Almost all private and public sector banks have posted good results in the first quarter in terms of earnings, profitability and business growth. However, fresh slippages and elevated levels of non-performing assets still remain a concern for the investors. Take State Bank of India for instance. The country’s largest lender posted its highest ever quarterly net profit at ₹6,504 crore in Q1FY22. However, fresh slippages during the quarter went up to ₹15,666 crore (from ₹3,637 crore in the year-ago quarter). Although, the bank said it was able to claw back Q1 slippages to the tune of ₹4,700 crore in July.

Covid impact

Similarly, major private sector banks including HDFC Bank, ICICI Bank, Axis Bank have all witnessed deterioration in their asset quality in the first quarter due to the impact of the second wave of pandemic.

In its recent report on largest private sector lender HDFC Bank, Emkay Global said, “The bank has managed the first Covid wave well, but the GNPA ratio shot up to a decadal-high of 1.5 per cent in Q1, reflecting accumulated Covid-induced stress in the retail portfolio and the impact of the health scare on collection teams’ mobility.”

The RBI also, in its Financial Stability Report (FSR), said macro stress tests indicate that the gross non-performing asset (GNPA) ratio of scheduled commercial banks may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario; and to 11.22 per cent under a severe stress scenario.

Portfolio rejig

Market experts also attribute the FPI outflow from the financial services stocks to the sector’s underperformance and portfolio rejig efforts by the foreign investors.

Motilal Oswal Financial Services’ recent analysis on institutional ownership in Nifty-500 and Nifty-50 companies highlighted that in the Nifty-500 universe, FIIs have the highest ownership in private banks (48 per cent) followed by NBFCs (31.5 per cent), Oil & Gas (22.5 per cent), Insurance (21.6 per cent) among others.

“Financials has had a dominant run over the past few years. However, BFSI’s (private banks, NBFCs, insurance, and PSU banks) underperformance has continued to reflect in the FII allocation – down to 38 per cent in the Nifty-500 as of June, from 45.1 per cent in December 2019 and 40 per cent in March 2020. This has resulted in the trimming of weight by 130 bps q-o-q (quarter-on-quarter),” it added.

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