Home / Markets / Mark To Market /  Financial stocks gain strength amid mixed  signals of an economic revival

Shares of financial companies have been on fire of late with some of them surpassing even their pre-covid highs. The Nifty Financial Services index has gained 28% in just six weeks, while the banking index is not too far behind.

Granted, the benchmark Nifty’s gains are far more, but unlike it, the reasons behind a surge in financial stocks is not entirely liquidity.

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The theme unravelling is that of a milder-than-feared pain from the coronavirus pandemic and faster-than-expected economic recovery. Adding to the bullishness is surely the surfeit of global liquidity and surge in dollar inflows.

New high
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New high

Banks and even non-banking financial companies (NBFCs) have reported an improvement in profitability despite the pandemic-led disruption. While the impact on credit growth from covid-19 cannot be ignored, analysts said there has not been a sharp rise in stress levels on the lenders’ balance sheets.

Investors also seem to have cheered the upbeat commentary from the managements of lenders. Almost all banks and large NBFCs have shown a sharp recovery in collections, thereby improving the outlook on asset quality. Delinquency ratios have trended downwards instead of rising, partly due to forbearance. Analysts at Kotak Institutional Equities said the stress from small businesses may have risen, but large corporate loans have seen a reduction in stress for banks.

“This broadly explains strong recovery in the net profits of banks despite the negative impact of covid-19 on loan growth and NPLs," a note from the brokerage said. But not every lender’s shares have received the same warmth from investors.

While Bajaj Finance Ltd and mortgage major HDFC Ltd have surpassed their pre-covid highs, others such as Mahindra and Mahindra Financial Services Ltd, Shriram Transport Finance Corp. Ltd and Piramal Enterprises Ltd are still lower than their pre-pandemic levels.

Needless to say, lenders with big balance sheets have been at the forefront of the gains. Bajaj Finance’s shares touched an all-time high on Tuesday.

Among banks, too, there has been a divergence. The most valuable lender, HDFC Bank Ltd, is up 12% from its pre-covid levels. Rivals ICICI Bank Ltd and Axis Bank Ltd are yet to show the climb. Public sector lenders, which were late entrants to the market rally, are nowhere close to their pre-pandemic levels. But analysts hope that shares of these banks may soon catch up, given the liquidity.

“The money is chasing quality. But the general outlook is getting better, and dollar inflows in emerging markets are not likely to stop. Financials are most attractive now," said an analyst, seeking anonymity.

The key question now is whether this rally will run into risks. Red flags are visible in the form of depressed discretionary consumption and weak small business balance sheets. For NBFCs, the clouds over funding still remain beyond the big names.

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