Though shares of embattled lenders have seen a short-term spurt, high-quality financial stocks still have the potential for good returns as focus returns to underlying fundamentals, according to Marcellus Investment Managers’ Pramod Gubbi.
The banking rally has largely been a result of a recovery in lenders earlier mired in trouble, the founder of the portfolio management services provider told BQ Prime’s Niraj Shah. That has triggered rerating for such lenders, while “quality financials” have failed to shine.
The Bank Nifty has hit 52-week highs, surging more than 20% in the past year compared with a little over 3% rise in the benchmark Nifty 50.
The performance, however, is skewed toward banks that were historically facing bad-loan trouble, he said. It’s a “one-off recovery” after a long period of correction as they “held back credit growth, preserved capital, recapitalised by raising money from the market”.
Once they stopped credit growth, they were able to provide for some of their “old problems” and then came capital infusion, according to Gubbi. “Lending discipline was only “one half of the solution”.
“Also, serendipity is a factor here,” he said. As steel prices rallied, several banks with massive steel NPAs benefited because of recoveries from written-off bad loans, providing a “big earnings boost,” Gubbi said.
That, however, won’t lead to sustainable earnings growth “because you’ll have to have a continuous source of NPAs which will go bad and then become better”.