Kotak Securities spots contra opportunity in the banking sector

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Kotak Securities , a brokerage firm, spotted a contrarian opportunity in banking stocks. This opportunity is regardless of the uncertainties that existed in the form of potential Non-Performing Assets (NPA) and weak lending growth.

The firm believes that investors can take 2-3 years of converse view on the banking sector, so they should keep assembling the banking stocks in every decline. It can impart good returns in the next 2-3 years. Nifty Bank index is trading near to its lowest valuation band. Kotak Securities declared that the average one-year upside of 18 banks that they cover, works to almost 50 percent of the total.

Recently, the rating agency ICRA (Investment Information and Credit Rating Agency of India) has amended its credit growth outlook down for banks to 2-3 percent for the current fiscal year. It is also found that the COVID-19 pandemic-driven stress may leave 3.1-3.7 percent of assets on a bad loan list. Earlier, it had foreseen a credit growth for banks at 6-7 percent.

Most of the banking players have failed to bring a positive return to investors in 2020 so far. The Nifty Bank index has ruptured nearly 29 percent YTD (Year-to-date) with IndusInd Bank NSE -3.08 %, which falls at 59 percent. It was accompanied by RBL Bank (down 49 per cent) and State Bank of India (down 43 percent). The credit growth rate of private lenders such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank have also diminished between 9 percent and 40 percent during the same period.

The brokerage included that the economic activity in the country is retrieving but at a relaxed rate. Kotak Securities spots flat earnings growth for Nifty 50 companies in the financial year 2021. They also expect a growth rate of 34 percent and 19 percent in the financial year 2022 and, in the financial year 2023, respectively. Going ahead, Kotak believes that the sudden improvement in the next financial year will be primarily based on automobiles, banks, metals, and telecom stocks.

However, it is featured that the yielding trajectory of financials will depend on the range of normalization the economic activity over the next few months.

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