Outlook for Financials: The whole financial services space looks fine to us now: Vinay Sharma

“Indian companies have deleveraged and now there are no major burdens from any segment of industry or MSME or from the retail segment. Even some non-credit segments like insurance and capital market players have corrected sharply in recent quarters,” he says Vinay Sharmaequity fund manager, Nippon India Mutual Fund.



Big private lenders aren’t performing in trade but mid-cap names are showing up in Q1 data and market. What is your reading of how the sector is placed?
It’s a matter of the rising tide lifting all the boats. Banking sector fundamentals have steadily improved over the past five to six quarters. This is now also reflected in share prices.

The outperformance of one segment over another is also a matter of valuations and it is likely that some of the mid-cap names were more attractive than some of the large-cap names to begin with. But since large-caps have performed well over the past few quarters, maybe that’s a baseline difference or an ownership issue because large-caps are held fairly well while mid-caps and small-caps may not be as popular, particularly in the financials sector.

We suspect it’s a combination of all of these factors. Now the fundamentals of the sector are looking good and the results are coming in better than expected or at least in most cases in line with expectations that have been announced over the last quarter or two. The pre-announcements that have been made this quarter and valuations that are reasonably cheap relative to fundamentals and the average it has traded at for the past several years.

There are several good banks to choose from. Do you think the PSU banks have made the cut now?

Honestly, it’s a very tough question at this point. If you had asked me a year or two ago, I would have said that the big private banks are the best positioned in terms of market share gains, positioning and portfolio quality. But today, most segments, as well as large and mid-sized banks, have largely cleaned up their balance sheets.

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Indian companies have deleveraged and now there are no major charges from any segment of industry or MSME or from the retail segment. Even some of the non-credit segments like insurance and capital markets stocks have corrected sharply in recent quarters.

It’s a much tougher question now because big private sector banks and big PSU banks have remained the top question just because they’re big and liquid and valuations are still reasonable, but we’ve got our hands on the mid-caps and small-caps now employed. We have also increased allocation to some of these stocks in recent quarters. Currently there is no clear demarcation or clear choice between large private sector banks or large PSU banks or mid-sized banks. All of which looks pretty attractive at this point.

Do you see a particular trend toward hardcore banking, finance, insurance, or card companies? Do the ratings still offer consolation on the upside?

You asked about too many segments in a question, but again, many non-credit sectors or sub-segments have become attractive over the last three quarters. We can’t talk about individual names, but some of these segments are attractive in the sense that credit card penetration in India is low and can grow at a reasonable pace over a sustained long period of time.

Microfinance has been going through its own troubles in the last two to three years, like Covid and some troubles in certain regions. Now it looks like microfinance is coming out of these troubles and growth could be good over the next few quarters and valuations have corrected sharply.

Similarly, Indian insurance has always traded at a large premium to global markets and emerging market stocks, but if you look at what they’ve traded, they’ve become attractive in recent quarters as most insurance stocks have done nothing in terms of price performance or they’re well below their all-time highs to the point that they’ve even become attractive, and insurance is again like credit card penetration, which is still appropriate.

There is scope for a reasonably long period of time, and new segments of insurance continue to emerge that insurance companies in India have not previously engaged in. I’d say it’s a mix of everything, there’s some cyclical tailwinds in some of these sub-segments, there are some plays that we like from a purely bottom-up approach.

It’s a mix of everything, but like I said, it’s pretty hard to pinpoint which segment I like at this point. The whole financial services space looks fine to us.