Banks with big corp exposure to benefit most from rebound

MUMBAI: Banks with higher exposure to corporates are likely to outperform as economic growth picks up, said Motilal Oswal which counts ICICI Bank, SBI and Axis Bank among its preferred ideas in the sector. The brokerage said valuation headroom along with an earnings pick-up can lead to a performance divergence where these corporate banks outperform. The shift in valuation multiple expansion to highs from lows as a result of this divergence can drive outsized gains, said the brokerage.

Motilal Oswal has an overweight stance on the banking, finance and insurance sector. The Nifty has gained 12.2% in the calendar year 2021 so far and the Bank Nifty has gained 10.5%.

"...the cycle for the corporate banks now seems to be changing. Large banks such as SBI, ICICI, and Axis have undergone adverse corporate asset quality cycles, which bottomed out over FY18–19. These banks have also beefed up their balance sheets by raising capital during the pandemic and emerged stronger in FY21 with the solid performance on PPOP (pre-provision operating profit)/earnings and asset quality,” said Motilal Oswal.

The brokerage said economic growth drivers are shifting towards capital expenditure and manufacturing. As growth picks up and the peak of stress is behind us, the combination of earnings tailwind and re-rate in valuation multiple provides room for outsized returns, said Motilal Oswal.

The banking, finance and insurance sector has seen a large divergence in performance due to slowdown in growth and stress in asset quality.