FII outflows and over ownership in large banks has hurt stock prices of large banks: Vinay Sharma

New Delhi: The Banking sector has been in focus as credit growth has come back to double digits and keeps consistently going up with each passing month. Further, specific banks have disclosed their loan and deposit base growth which has come in healthier for banks like IDFC First, AU Small Finance, IndusInd Bank and even Yes Bank to a certain extent.

Despite this, valuations in the banking sector appear reasonable when compared to the 5-year average with Kotak at 3.4 versus the 5-year average of 4.5, Axis Bank at 1.7 versus a 5-year average of 2 and HDFC Bank at 3 versus a 5-year average of 3.8. IndusInd Bank too is trading at 1.3 times versus a 5-year average price to book of 1.7.

On valuations, Vinay Sharma believes that the over ownership in large counters is what is hurting the stocks of large private banks. He believes that the FII outflows, which have been sharp over the last few months and continue to increase month after month, are part of the reason of the fall. He also believes that an important trigger for large banking counters will occur when FII outflows reverse.

The credit pick-up in the banking system has been despite the increase in interest rates. Vinay believes that one of the reasons for credit growth pickup is low base effects of last year when credit growth was sub 6%. He says that retail has always grown in the mid-teens and has now come back in full force but the positive sign is the pickup in large industry which has been sluggish since a while. He notes that the India Inc deleveraging phase since 2015 now seems to be reversing.

On the pocket of value, he believes that now is the time to take some risk as the cycle turns and growth comes back in a big way. On this premise, he believes that valuation in small and mid-sized banks looks attractive and he is hence positive on small private banks and mid-sized public sector banks. He also believes that there are plenty of options for good investments in the para-banking and insurance which have also corrected substantially.