FIIs have been net sellers in the financial segment this year, raising concerns over sectoral underperformance. However, Joshi, in his interaction with ETNow, pointed out that easing valuations could make financials an attractive bet once selling pressure subsides.
“If you are seeing that sort of easing out of the valuations, that also could be one of the reasons why financials will do well,” he noted.
Joshi also identified specific banks within the sector that are well-positioned to benefit from this improving outlook:
Kotak Mahindra Bank – A top private sector player expected to perform well as deposit normalization supports business growth.
Bank of Baroda – Showing strong financial resilience and gaining market share within public sector banks.Karur Vysya Bank – A mid-sized private sector bank that is likely to post reasonable numbers going forward.With financial stocks correcting amid FII selling, valuations remain reasonable, offering a compelling entry point for long-term investors.
“Valuations are not too expensive as well. And as we see the structures, the rating and rankings that we have at Marketsmith India, some private and mid-sized banks look poised for strong performance,” Joshi explained.
Why financials could outperform?
According to Joshi, multiple factors support a positive outlook for banking stocks:
- Deposit Normalization: The sector’s biggest concern has been deposit stability, but as this normalizes, banking stocks are expected to reflect improved growth.
- Rate Cut Uncertainty: While an interest rate cut cycle may be delayed due to U.S. and domestic factors, this could also help banks retain higher deposit rates, benefiting their net interest margins (NIMs).
“It is also beneficial to an angle because if the rates start going down, the deposit rates might start going down as well significantly and that might again hamper the entire ecosystem in terms of garnering more deposits,” he said.
- Stronger Asset Quality: Regulatory measures on unsecured loans and risk-weighted assets have significantly reduced concerns over asset quality deterioration. Joshi highlighted the Reserve Bank of India’s (RBI) steps in curbing personal loan risks, which should result in lower slippages and healthier balance sheets.
- Earnings Upside: As a result of these structural changes, earnings growth in financials is expected to pick up in the first half and improve significantly in the second half of the year.
FII selling stats
For the quarter ended December 2024, the FIIs had offloaded significant stakes in 4 banks, according to the data compiled by Kotak Institutional Equities. These were IndusInd Bank (8.9% decrease in holding), Axis Bank (-4.6%), Bandhan Bank (-3.5%), Ujjivan Small Finance Bank (-2.7%) and Punjab National Bank (-2.7%).
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
