The downturn, however, offers longer-term investors an opportunity to pick quality stocks, which, in calmer times, trade at exorbitant valuations.
“Indian banks have cleaned up their asset quality over the past few years. Lending standards have become more stringent. While there could be slippages in asset quality and moderation in credit growth, these concerns are adequately reflected in current prices,” says Aggarwal.
The sector’s longer-term prospects remain bright. The penetration of financial products is low in India, which provides ample runway for growth.
In the past few years, new opportunities have arisen, such as life insurance, general insurance, and asset management companies. Fintech companies could get listed soon.
However, do not enter expecting a quick turnaround. “Asset quality issues could emerge on loans given in the past. These could affect earnings for at least three-four quarters,” says Parmar.
Investors should focus on top-tier banks. “Deposit outflows have been reported from mid-cap banks. This money will flow to larger banks, reducing their cost of funds,” says Aggarwal.
Insurers may also be considered, as the fear generated by the pandemic could lead to people purchasing more policies.
Asset management companies may be bought, provided they have not faced issues in their debt funds recently. Be cautious about investing in non-banking financial companies (NBFCs). “Due to the moratorium allowed by the Reserve Bank of India, customers have a choice not to make payments. But these NBFCs
still have to pay interest on their own market borrowings. This could create a cash-flow mismatch for them,” says Ankur Kapur, managing partner, Plutus Capital.
Those with higher risk appetite may opt for NBFCs
reliant on gold loans since the price of their main collateral is on the upswing. “Avoid both banks and NBFCs
with a higher proportion of unsecured loans and SME loans,” says Parmar.
Investors with at least a seven-year horizon may invest in a banking and financial sector fund having a consistent track record. Avoid those with exposure to the more vulnerable segments mentioned above. Allocation to a sector fund should not exceed 5 per cent of the equity portfolio.