Private bank stocks may head higher

The Street is hoping that Q2, Q3 will see a pick-up in consumption and better economic activity

The past month has seen speculative market positions taken in sectors like private banks, automobiles, multiplexes, and real estate. All of these can be described as trades based on hopes that Q2 and Q3 will see a pick-up in consumption, and better economic activity.

While base effects will moderate in Q3, we do have some positive signals that macroeconomic growth may accelerate. The PMI for the services sector jumped in August, after slipping into contraction territory in July. Manufacturing was also in expansion territory in August. Inflation also eased off slightly, though there is a high base-effect to consider. The Maharashtra government easing Covid restrictions has also led to some long trades in the multiplex sector.

There is a K-shaped recovery at the moment in big-ticket consumption areas. Passenger car sales are doing much better than two-wheeler sales, though even car sales are well below 2019 levels. In housing, high-end and mid-range properties are doing better. Credit card usage has picked up and there are lower bounce rates, although the bounce rates are still objectively high.

Most investors are hoping the festive season will see a comeback for twowheelers, and better car sales. One positive signal suggesting an improvement in market conditions at the lower-income end is that microfinance collections have also picked up since July and August. The kharif harvest is also estimated to have been good, which may boost rural and semi-urban consumption.

Results in the banking sector will be crucial. Credit growth has been very low for several quarters, and it’s hard to tell the actual

NPA situation for many banks. Corporate credit demand has been low because most industries are running at below capacity.

Banks have shifted their strategy to target retail customers because this segment may see faster growth than corporate, and also because defaults on the retail side tend to be lower. Obviously, banks (and investors) will be hoping for a significant rise in credit demand across Q2 and Q3.

The RBI Monetary stance is favourable for the financial sector. The central bank cut rates through last financial year and it has held rates stable in the last two policy updates despite higher inflation. The RBI has also taken an accommodative stance with other measures to ensure easy liquidity.

As a result, banks, in particular, are enjoying the low cost of financing and good net interest margins. Indeed, the real interest rate at which banks are raising money may be negative at this moment. Of course, low-interest rates have also helped many corporates across multiple sectors to restructure debt and deleverage balance sheets.

The logic of betting on a consumption pick-up is speculative and forward-looking in nature but that’s typical of the stock markets. There are possible downsides if, for example, the anticipated third wave of Covid is more severe than expected, or if macro-economic growth rates disappoint. The real estate sector’s troubles in China may also trigger a downgrade in global growth rates and lower prices in the global commodity markets, especially in industrial metals.

Private banks may outperform if these downside risks are not triggered. In the past month, while the Nifty and the Bank Nifty have risen around 7.3 per cent, the Nifty Private Bank has returned 8.9 per cent. The auto sector has also jumped 9.75 per cent, with ancillaries, such as Balkrishna, Exide, Bosch, Amara Raja, outrunning vehicle-makers.