The Underperforming Sector of 2020 Might Rebound in 2021
The impact of the Covid-19 pandemic was seen on the banking and finance sector. However, visible in the first week of January, the underperforming financial sector of 2020 has taken a sharp rebound. The benchmark indices revived by about 15 percent each in the year 2020 and most sectors outperformed in the year as the rally was broad-based barring S&P BSE Bankex (down 2.1%), BSE Oil & Gas (down over 4%), and Utilities (down 0.4%).
“The situation was much better with financial services companies as they managed to generate a positive return going by the Nifty financial services index. In 2019, Nifty financial services went up by 25.8%. As the economy rebounds, the future of the BFSI sector could improve in the months to come,” Harsh Jain, Co-founder, and COO, Groww
Mentioned below is a list of top picks among banking and financials for the year 2021, curated by various brokerages including Axis securities, Angel broking, and IIFL securities.
1. Ujjivan Small Finance Bank:
Ujjivan SFB (UJSFB) is a diversified SFB that transitioned from an NBFC in Feb’17, primarily catering to the low and middle-income individuals and businesses in the metro and urban areas that have limited or no access to formal banking and finance channels.
“We expect the book to grow at 23% CAGR over FY20-23E driven by a strong growth of 44% CAGR in non-microfinance segments, albeit on a smaller base,” said the note.
The fast-paced diversification from a micro financier to a small finance bank and the recent ramp up in the liability franchise after a slow start works in favor of the bank, believes Axis securities.
2. ICICI Bank:
The largest private bank in India with business operations, ICICI is spread across Retail, Corporate, and Insurance, etc. Its subsidiaries ICICI Venture Funds, ICICI Pru AMC, ICICI Securities, ICICI Prudential, and ICICI Lombard are amongst the leading companies in their respective segments.
The bank expects the corporate restructuring book to be ~1% of loans and credit costs to normalize in FY22. The recent capital raise has improved Tier I to 17.9% which provides an adequate balance sheet buffer.
3. Manappuram Finance:
The leading gold loan NBFCs in India, Manappuram Finance (MGFL), is well diversified into other business segments like housing loan, vehicle loan, and microfinance, with a branch network size of around 4,623 spread across the country.
The brokerage firm, Axis securities, expects MGFL to maintain ROAE of ~24% over FY21/FY22. Gold lending is a high moat business and specialists like MGFL will continue to benefit.
4. Can Fin Homes:
A 33year old CAN FIN HOMES (CANF), is a retail-focused housing finance company, promoted by Canara Bank (30% stake). It is focused largely in Tier II/III cities with 90% of loan books for housing and the rest for non-housing.
The company is expected to recover faster than its peers due to its loan mix and negligible developer exposure from the Covid 19 impact.
“We expect lower provisions and built-in improved NIM for FY21E. We remain positive on the stock given its loan book profile, stable liquidity position, and robust CAR (25%) and maintain buy," said a note.
5. Federal Bank:
A Kerala-based private sector bank has exposure to insurance and NBFC business through its joint venture with IDBI and wholly-owned subsidiary Fedfina respectively.
The valuation is expected to improve from the current level considering strong underwriting standards, changing loan mix, and strong retail deposit franchise.
The bank’s liability franchise remains strong with CASA plus Retail TD of ~90% and one of the highest LCR amongst banks. While Q3FY21 could witness hiccups in asset quality, it is expected that higher provisioning should hold FB.
6. Bandhan Bank:
Having a strong deposit base & low cost of funds coupled with diversification away from West Bangal and MFI along with stable NIM's and RoE's will lead to a retaining for the Bandhan bank.
7. IDFC First Bank:
Efforts to build retail liability franchise, fresh capital infusion, and provision taken on the wholesale book will help to tide over this difficult time, believes Angel Broking.
8. Aavas Financiers:
Aavas by focusing on self-employed non-professionals that lack adequate income documentation has carved out a niche for itself in affordable housing finance.
"We expect the cost to income to decline to go ahead as operating leverage kicks in. We expect Aavas to post loan growth of ~25% CAGR over FY20-22E and expect ROA and ROE to sustain at current levels," said the note.