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investment strategy: Does it make sense to invest in bank and IT midcaps now? Dhananjay Sinha answers

“Many stocks that were seeing considerable erosion over the previous six months, are bouncing back. That is reflected across the board – be it small bank or mid bank or even midcap manufacturing sector and capital goods sector. All of those are doing fairly well,” says Dhananjay Sinha, Head of Strategy Research & Chief Economist, Institutional Securities


Midcap banks are coming back into favour but while these will create wealth for investors, do you believe that it is still the largecap banks that will take precedence as leaders over the long term?
Yes, within the banking sector, there is very intense competition as far as business is concerned. The results of the large banks showed that , or even are struggling to gain traction as far as corporate lending is concerned. Everybody is doing retail lending. Banks are veering towards taking more risks with respect to business banking, MSME or even uncollateralized lending. So banks are growing their credit cards.

It is a fairly truncated business growth that is happening and in that context, if larger banks are facing considerable competition, it is quite unlikely that the smaller banks would be in a very comfortable scenario. The business outlook for the banking sector is a challenge at this juncture and this is in the context that interest rates are rising. Earlier, post Covid, banks had gained with respect to margins because they cut the fixed deposit rates dramatically and the lending rate did not fall as much. They benefited from a falling rate scenario and the margins rose.

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Right now, it is reversing and that is part of the business cycle as far as banks are concerned in the long term as well. I would say that since the banking products are not very differentiated, it is commoditised and large banks are getting into areas where small and midsize banks have been and so the competition is also lingering on across the spectrum.

On the other hand, there has been a considerable increase in the operating costs. The operating cost of most banks, including smaller ones, are rising 25-30% or 25-28%. That is creating pressure as far as the operating metrics is concerned.

I have also noticed that in the large banks, slippages have been rising despite the fact that their NPA ratios are still falling because of recoveries. Fresh slippages have been rising for large banks. It will be the same for smaller banks as well. I would say business growth for the banking sector is a challenge at this juncture. Credit growth has gone up to 13-14% largely because of rising commodity prices.

Just like the midcap banking space has made a comeback, do you see there is merit in buying midcap IT also? It is not that growth has gone forever?
The midcap sector in general has been doing fairly well. In the last one and a half months, there has been a fairly strong rally in the industrials or manufacturing sector and even the capital goods segment. BSE Industrial has made a new high by rising by almost 26-27%. There is a renewed sense of activity as far as the domestic retail investors are concerned or the smart investors are concerned. What has really turned the tide is essentially the fact that for the last one and a half months, the FII numbers have started to turn positive and domestic players or retail players were actually waiting for an opportunity.

Many of these stocks that were seeing considerable erosion over the previous six months, are bouncing back. That is reflected across the board – be it small bank or mid bank or even midcap manufacturing sector and capital goods sector. All of those are doing fairly well.

Not just that, if you look at the banking index itself, Bank Nifty has rebounded from 32,000-33,000 to 38,000-39,000 now. It is close to the peak.

All the deep cyclicals, metal stocks have also rebounded by almost like 25-28%. The sector was fairly depressed in the previous three, four months. So, a multiple expansion is happening. There is a benign view with respect to flows and interest rates and also with respect to the dollar and stuff. We have to see whether this is sustaining or not. It has largely to do with how the fundamentals are moving, what is the earnings trajectory etc.

As in the case in global markets, it is actually reflecting here as well that market is actually looking at easing of rates by the central banks in US and other places, especially the Fed. We found that the futures market has an expectation of rate cuts. The dollar actually weakened and that created a risk-on trade world over and that permeated in India as well. So there is a spillover effect which is continuing till now. It might start plateauing in some time.


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