We see private banks placed well from both structural and cyclical perspective to capture the opportunities

BFSI Industry Interview
On: Nov 30, 2021 | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - We see private banks placed well from both structural and cyclical perspective to capture the opportunities

Mr. Kochar has a professional experience of over 6 years, predominantly as a research analyst. He has joined Mirae Asset in September 2019. In his capacity as an analyst he looks after the BFSI sector. Prior to this, he was associated with Ambit Capital, as a research analyst covering Financials. By qualification, Mr. Kochar is a Chartered Account.

The stock market was volatile in November. What is your outlook on Indian equities in the near (12 months) to medium term (3 years)?

In our view, it is futile to predict markets, more so over the short term. The markets have doubled over the last 18 months from its lows in April 2020, and are still well above Feb-20 (Pre-COVID levels) despite the recent correction.

However, we still remain fairly optimistic on India's prospects and note that typically second half of financial year is better from demand perspective as it coincides with festive season. Demand revival, market share consolidation in multiple industries, commodity inflation, infrastructure spend by Governments globally coupled with operating leverage and balance sheet deleveraging are strong drivers for earnings.

Moreover, banks being well-capitalized even while sitting on excess provisions apart from having record surplus bond holdings, bodes well for overall recovery. Given the above alternations in the economy which are underway & will likely lead the path for faster future growth of the economy, we would continue to remain overweight on the BFSI sector over medium to longer term.

In your view, how will US Fed's tapering of bond purchases and its impact on the equity market will play out?

Based on the statements by US Fed till now, one can conclude that the Fed will continue on a gradual tapering path with advance guidance on the same. India’s external position is quite comfortable at present and may not be affected much in such a scenario.

The interplay of bond and earnings yields over the next few months will determine the next leg of market movement with the magnitude and momentum of increase in bond yields a key variable. Theoretically, higher bond yields could keep equities in check, but eventual market performance will be a function of expected earnings growth, which as of now is strong for Indian equities.

We expect strong economic and earnings recovery in the short term and possible multi-year investment cycle in the medium term to provide support to the Indian market.

Global commodity prices continue to remain high. What are your views on near term trajectory of interest rates and its impact on equity markets?

Yes, Global commodity prices continue to remain high, while there is some cool off on the metals front, energy price continue to remain high for now. The interest rate trajectory will be a function of global central banks view on the growth and inflation, which as of now is still in the transitory phase. While, after a sharp interest rate reduction over the last few quarters to support the economy, one can assume some reversal in the medium term. However, as said earlier, the impact of the same on the equity markets will depend on the earnings growth and as long as the growth remains strong, it should give support to the markets. The current Nifty companies Bloomberg consensus growth estimate is at 22% CAGR over FY20-24 and Nifty P/E at ~17x FY24E appears reasonable in this context.

You launched Mirae Asset Banking and Financial Services Fund almost a year back. Many investors associate financial services primarily with banks and NBFCs. For the benefit of retail investors, please explain which sectors are included in the broader financial services space? What are the growth prospects of the non-lending sectors in financial services in India?

Non-lending financials (insurance, brokerages, AMCs & wealth management companies) have seen strong growth over past few years supported by significant under-penetration and rising mix of financial savings. We expect growth trajectory in these segments to stay buoyant as penetration improves while pick-up in operating leverage drives robust growth in profitability. Also, it is interesting to note that a lot of this growth is being driven by technology which even at broader level is at an inflexion point reflecting in the huge investments being made in the FinTech space.

Private sector banks have underperformed the Nifty in 2021. What is your outlook on private and public sector banks from a 3 to 5 years investment horizon?

The private banks have seen much better growth and profitability over the last few years vs PSU Banks and have doubled their credit market share over the last decade. Whilst the asset quality of PSU banks has improved, the credit growth has not picked up. Further, on the tech side, the private banks have seen better trends and have made significant investments in systems and IT infra which is still ongoing in many PSU banks. PSU banks are grappling with their own set of challenges - merger and capital (for a few banks). We see private banks placed well from both structural and cyclical perspective to capture the opportunities over medium to longer term.

Since your inception, you have outperformed your benchmark Nifty Financial Services TRI by a big margin. In contrast, most of your peer funds in the banking and financial services category failed to beat Nifty Financial Services TRI. What do you attribute your alpha creation to? What is stock selection strategy?

Its been just about a year since the launch of the fund and thus one year is a very short-term metric to track any fund performance. While every fund has their own investment strategy, I can only highlight the investment philosophy that we follow at Mirae. We believe in a strong bottom up research, identifying the stocks within sectors by applying qualitative filters (quality of franchise, management vision & strategy, competitive positioning) followed by an in-depth quantitative filtering (Size of the opportunity, market share, return ratios, earnings outlook). After getting comfort on the above factors, we move ahead to valuation (both absolute & relative) where we do a detailed residual-income based valuation to arrive at a fair value of business. While alpha generation is an outcome, our objective is to typically stay invested in quality businesses over a longer term, led by efficient management with sustainable growth and profitability.

Why is this an opportune time to invest in financial services over a long investment horizon? What should be the minimum recommended tenure for investors who want to invest in Mirae Asset Banking and Financial Services fund?

There are many reasons why one should look to invest in BFSI space now -

  1. Closely linked to the economy - Indian economy is coming out of soft patch along with muted credit growth over the last few years, however with improved jobs growth, recovery in consumption demand scenario, under-leveraged corporates ready for next leg of capex cycle, the economy is expected to revive strongly. We believe that the best way to play the economy upcycle is through BFSI sector;

  2. Improving ROEs – With the corporate NPA cycle largely behind, and incremental stress also moderating, we believe that the banking system is set to report significantly better ROEs over the next few years. Normalization of credit costs and growing coming back are the two big levers for improved ROE trajectory towards >15% for the banking space;

  3. Digital & Fintech evolution – We believe that the fintech are becoming a key customer acquisition engine for the traditional players in both lending as well as non-lending platforms. Further, while the fintech benefits from scale, aiding reduction in operating costs, the product and the balance sheet strength lie largely with the manufacturers, thereby making it a win-win partnership between the two. We see the fintech players as enablers rather than disruptors, with strong synergies in collaboration;

  4. Comforting valuation – While the valuation is +1SD above long term average, we believe it is not reflecting the ROE expansion >15% over the medium term. At current valuations, we believe that the risk reward is quite favourable and there are enough tailwinds on credit growth, penetration story which can lead to strong earnings over medium to longer term.

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