The increasing share of financial stocks in the Indian equity market
On a day when the benchmark Sensex breached the 32,000-mark and the Nifty ended Tuesday’s session within kissing distance of 10,100 points, HDFC Bank Ltd overtook Tata Consultancy Services Ltd (TCS) to become India’s second-most valuable company. HDFC Bank’s rise is part and parcel of the growing clout of financial services firms in the Indian capital market.
Indeed, the market capitalization of financial services firms as a percentage of the market cap of the S&P BSE 500 index has risen sharply over the last decade-and-a-half. From around 13% in 2007, the share of financial services firms to the market cap of the index has surged to around 23% (see Chart 1).
A further break-up shows that the market cap of private financial services firms as a percentage of the index’s market cap has more than doubled over the aforementioned period.
On the other hand, the share of state-owned financial firms has come down. This should not come as a surprise since public sector lenders’ balance sheets are still chock-full of bad loans and their credit growth has been very low. Private sector banks and non-banking financial companies (NBFCs) have taken up the slack. Chart 2 shows how the Nifty Private Banks index has easily beaten the Nifty.
Between private sector banks and NBFCs, analysts find the latter better placed given their focus on retail lending. They say this is also one key reason why large NBFC stocks are currently trading at premium valuations to private sector banks.
In the first four months of fiscal year 2018 (FY18), bank loans to corporates continued to decline, but credit cards and personal loans were drivers of incremental growth, showed the latest credit growth data from the Reserve Bank of India.
While some analysts are optimistic about retail lending driving growth especially for NBFCs, some others like Ambit Capital have their doubts.
In a recent report, Ambit Capital said that despite income and employment having slowed during FY12-FY17, India’s nominal private consumption growth surprisingly rose. “This rise of consumption growth appears to be the result of the rise and rise of retail credit. As corporate demand waned, banks and NBFCs aggressively pushed retail credit, resulting in India’s retail credit to GDP (gross domestic product) ratio rising from 13% in FY12 to 16% in FY17,” it said.
The brokerage firm is of the view that the current bout of credit-fuelled consumption is too good to last. This trend is unlikely to sustain, impacted by declining consumer confidence, low household savings ratio and emerging retail NPA (non-performing asset) problems particularly in the housing finance segment, it said.
Incidentally, despite their large share of market capitalization, the share of financial services in overall gross value-added for the entire economy for FY16 was a mere 5.8%, at current prices.
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