Banking and economic services stocks underperformed the benchmarks in calendar year 2020, with Bank Nifty delivering a adverse return of 2.8%, against Nifty’s 14.9%. This could modify this year as the banking sector is set to witness a re-rating on account of enhancing financial outlook and the concentrate on development and profitability. Market authorities think 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 final higher in January, but the Nifty Bank is up by only 12.2% in the course of the exact same period.
Experts think that the banking stocks will continue to outperform as the banking sector is at the starting of an earnings upgrade cycle. Banking sector’s earnings are anticipated to swell in CY2021 on the back of larger development in credit, which is slated to enhance as the GDP would develop at 14.4% in FY22, according to Budget estimates.
Moreover, the government’s growing allocation towards capital expenditure and the proposal to develop a ‘bad bank’, along with an anticipated surge in corporate capex, have helped enhance the outlook for banks.
Lalitabh Shrivastawa, AVP- investigation, Sharekhan by BNP Paribas, stated, “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 significant private banks are currently sitting on great
capital adequacy which will incentivise them to lend.
According to authorities, enhanced demand in corporate lending, aided by improvement in the economy, will help development, and will be looked at as positive triggers for banking stocks.
Rusmik Oza, executive vice president, head of basic investigation, Kotak Securities, believes that banking stocks could see a enormous outperformance in 2021. He stated, “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 need to have larger allocation towards the sector considering that the weight of banks in Nifty-50 is 28% and BFSI’s is 40%.
This suggests one wants to have more than 30% weight in the banking sector in one’s portfolio to have meaningful outperformance more than Nifty-50.