Rush for financials: Domestic institutions sit on Rs 1.41-trillion headroom to buy bank stakes

Amid raging speculation over the return of the BJP-led government for the third straight term and expectation of a pick-up in private capex, domestic institutions are waiting on the sidelines to raise their stakes in banks and financials. Banking stocks are seen as reasonably valued bets at a time when the market simmers on high valuations, said analysts.

HDFC, ICICI, SBI as well as LIC are among the domestic institutions to have sought approval from the Reserve Bank of India for raising their stakes in banks up to 9.9 percent. This creates an additional headroom for purchases worth Rs 1.4 lakh crore over the next one year, with regulatory approvals in place.

For the uninitiated, the RBI’s prior approval is a must for anyone looking to acquire more than 5 percent stake in a bank as it is a highly regulated sector.

The rush to get approvals for higher stakes started in October 2023 on expectations that the Fed’s pivot to lower rates will prompt foreign investors to come back to Indian markets in a big way.

Also read: HDFC Bank Group gets RBI nod to acquire up to 9.5% stakes in Yes Bank, IndusInd & 4 others

The most recent approval came on February 6 when HDFC group received the RBI nod to acquire up to 9.5 percent in six banks – IndusInd Bank, Yes Bank, Axis Bank, ICICI Bank, Suryoday Small Finance Bank and Bandhan Bank.

LIC had earlier received the RBI go-ahead to buy 9.99 percent stake in HDFC Bank.

Banking sector outlook

Analysts as well as fund managers are bullish on financials, especially private sector banks, as they continue to gain market share while maintaining healthy asset quality.

Rating agency ICRA recently raised its projection of bank credit growth for FY24 to 14.9-15.3 percent from its earlier estimate of 12.8-13 percent.  For FY25, credit growth may temper to 11.7-12.6 percent, but it will still remain sizeable, ICRA said.

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ICRA also expects the gross NPA (non performing assets) to decline to 2.1-2.5 percent and net-NPA to 0.5-0.6 percent by March 2025.

On back of this, Pramod Gubbi, co-founder of Marcellus Investment Managers believes private sector banks, despite the recent underperformance, present an intriguing opportunity. “These stocks have relatively low valuations compared to other sectors that have seen significant growth,” he said.

FII comeback to propel bank rally

When the Fed started hiking rates in 2022, foreign investors sold around $17 billion of Indian equities. This, combined with the influx of domestic money, took the overall FII stake in Indian markets to a decadal low.

Also read: Eye on elections: Will FIIs flock to India and front-end investments?

According to a recent report by ICICI Securities, FII stake in Indian markets fell to 16.5 percent as of November 2023, hitting its lowest since 2012, while it had peaked at 20.18 percent in 2009.

Financials, with a weightage of more than 33 percent in the Nifty 50, will be the first hunting ground for FPIs when they resume their purchases in Indian markets in a big way, believe analysts.

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