In­creas­ing share of fi­nan­cial stocks in In­dian equity mar­ket

Mint Asia ST - - Otherviews - HARSHA JETH­MALANI


a day when the bench­mark Sen­sex breached the 32,000-mark and the Nifty ended Tues­day’s (12 Septem­ber) ses­sion within kiss­ing dis­tance of 10,100 points, HDFC Bank Ltd over­took Tata Con­sul­tancy Ser­vices Ltd (TCS) to be­come India’s sec­ond­most 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 sta­te­owned fi­nan­cial firms has come down. This should not come as a sur­prise since pub­lic sec­tor lenders’ bal­ance sheets are still chock­full of bad loans and their credit growth has been very low. Pri­vate sec­tor banks and non­bank­ing 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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