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Introducing the MOSL BFSI MOdel Portfolio

Overweight on banks and non-lending financials

* The financial sector is the largest constituent of all the benchmarks with weights of 38- 43% in Nifty50 and BSE-30 indices. However the divergent stock performance of Indian financials vis-a-vis the Nifty Financial Services index highlights the need for an active stock selection strategy. This becomes even more important owing to - (a) evolving liquidity scenario, (b) fast-changing macros, and (c) asset quality / growth outlook. In this endeavor, we introduce the MOFSL BFSI MOdel Portfolio with the objective of optimizing the sector’s risk-adjusted returns through a holistic approach to sector positioning.

* While the near-term outlook remains cautious due to COVID 2.0 impact and ongoing lockdowns in key states, vaccination drives across the country would aid quick recovery. Thus, we are positive on the BFSI space given strengthening economic recovery and the progress being made in improving asset quality. This would aid the strong rebound in earnings as the credit cost moderates.

* The RBI’s accommodative stance, along with the recent measures announced for impacted sectors, should help financials in general. The sector has underperformed the Nifty over past few months, which presents an attractive opportunity for active stock selection given the reasonable valuations. In our first edition of the MOFSL BFSI MOdel Portfolio, we are overweight on ICICIBC, SBIN, and AXSB among the lending large-cap financials. Within the mid-cap space, we like MUTH, CIFC, SHTF, and AUBANK. Among the non-lending financials, we like MAXF and IPRU within Life Insurance and ISEC, SBICARD, and IIFL Wealth within Other Financials. We believe that as the recovery momentum picks pace the valuation re-rating will play an important role in stock return. We are Underweight on NBFCs in general due to the looming uncertainty surrounding the second wave and rising inflation levels.

Benchmarks underperform Nifty over past three months; stock performance remains divergent

* In YTD CY21, the BFSI sector index (Nifty Financial Services) has performed in line with the Nifty, with returns of 8% v/s 9% for the Nifty. This was initially driven by (a) a progressive budget, (b) sharp improvement in collection trends, (c) lower restructuring reported by lending entities, (d) the launch of vaccination drives against COVID, and (e) economic activity reviving to pre-COVID levels. However, over the past three months, the sector has underperformed the Nifty due to a rise in the number of COVID-19 cases and consequent lockdowns in key states/territories. The sector delivered -3% returns v/s +1% by the Nifty.

* Further analysis indicates stronger performances from stocks such as IDFCFIRST (+59%), SBIN (+49%), CIFC (+47%), SHTF (+39%), MAXF (+37%), FB (+29%), and BFIN (+27%). We believe most entities, having recovered from the lows of Mar– Apr'20, are trading at reasonable valuations.

* Due to financial entities’ exposure to various segments of the economy and the difference in their liability structures, we see an opportunity to generate alpha by actively playing underlying product-specific themes (such as gold financing and capital market plays) and the evolving growth and CoF scenario.

First edition of BFSI MOdel Portfolio – Overweight on banks and nonlending financials

* We adopt a positive stance on the sector and expect it to outperform, supported by an uptick in economic recovery, improving asset quality, and a continued accommodative stance and relief measures by the RBI (amid higher inflation) – even as the near-term outlook remains cautious amid rising COVID cases and lockdowns.

* In our first edition of the MOFSL BFSI MOdel Portfolio, looking at the current valuation and our view on the earnings outlook, we are Overweight on banks and gold financiers among the lending financials.

* We are Overweight on ICICIBC (286bp), SBIN (244bp), and AXSB (104bp) as these lending financials offer sharp earnings recovery, while trading at reasonable valuations. PCR has improved sharply, while additional provision buffers should limit the impact on credit cost. We are moderately Overweight on CIFC (34bp) and SHTF (13bp) as we expect recovery to be the fastest in vehicle financiers. Muthoot is the non-index stock, and we have a weight of 3% for the relative safety it offers in these uncertain times.

* In the Life Insurance space, we are Overweight on MAXF, IPRU, and SBILIFE on an improving business mix, cost control, and healthy VNB growth – likely to aid margins. We maintain an Underweight stance on HDFCLIFE.

* Among the non-index stocks, we are overweight on MUTH (300bp), ISEC (150bp), IIFL Wealth (150bp), SBICARD (100bp), and AUBANK (100bp) given their valuations and expected growth outlooks.

Valuation and view

* After bearing the brunt of the pandemic over 1HFY21, demand revived in 2HFY21, with retail disbursements back at pre-COVID levels or even higher in certain segments. Collection efficiency also saw sharp improvement, resulting in controlled restructuring/slippage. While the near-term outlook remains cautious due to the rising COVID cases and lockdowns in key states/territories, vaccination drives across the country would result in a quick recovery. Thus, we expect the business momentum to pick up and estimate credit cost to normalize from FY22, resulting in earnings recovery over FY21–23E.

* We expect loans for private banks to grow 16%/18% over FY22E/FY23E and loans for large NBFCs to grow ~12%.

* BFSI stocks have underperformed the Nifty over the past three months owing to rising COVID cases and lockdowns. However this has also presented an attractive opportunity for active stock selection. Therefore, we focus on lenders with high earnings delta, a stable growth outlook with a competitive advantage, strong balance sheets and reasonable valuations.

* ICICIBC, SBIN, and AXSB are our top large-cap picks. In the mid-cap space, we prefer MUTH, CIFC, SHTF, and AUBANK.

* Among the non-lending financials, we prefer MAXF and IPRU among the life insurers and ISEC, IIFL Wealth, and SBICARD among other financials.

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