Stay away from these 3 financial stocks

The second covid wave has hit the economy very badly. After suffering a deep cut between March-June 2020, the Indian economy had bounced back smartly. However, experts fear the recovery will be slower this time because the spread of the disease has been wider. While it was restricted to urban areas last year, covid has reached villages this time. “Economic recovery could be more gradual for two reasons. First, the impact of restrictions are deeper and there is anecdotal evidence to suggest impact on agriculture activities. Secondly, there is a possibility that a section of the population might have dipped into their accumulated savings during the past year and therefore, possible recovery triggered by pent up demand would be lower,” says Prakash Agarwal, Director & Head -Financial Institutions, India Ratings & Research.Financials under stress The finance sector’s prospects are interlinked with economic growth and therefore, it will come under pressure this time as well. In fact, the negative impact on financial services sector may be more this time. “Though we need to wait for first quarter numbers, financial institutions will see incremental stress on their book because there is no blanket moratorium this time,” says Siddharth Purohit, Research Analyst, SMC Global.In addition to increase in defaults from the corporate side, financial institutions are also facing incremental stress on their retail books. As a sizable population has already exhausted its reserve money, chances of more defaults are high. The recent fall in collection efficiency—percentage of EMIs an institution is able to collect—is an indicator. However, large banks may be able to manage this jump in retail default as their exposure to this segment is not very big. “Retail loans are spread out and will be impacting all if lockdowns extend. However, large private sector banks are carrying adequate provision buffers for future delinquencies in these segments,” says Kajal Gandhi, Banking Analyst at ICICI Direct.83057956While big banks will be able to withstand using their muscle power, smaller banks and NBFCs will be under increased threat. “While collection efficiency will be impacted for all lenders, things are likely to be more difficult for NBFCs because they are dealing with weaker sections of society that has less capacity to withstand stress. While the proportion will be lower for secured loans like housing finance, the impact will be more in unsecured loans and vehicle finance. Their collection efficiency might be down by 15-20% by midMay,” says Agarwa.83057969What should investors do? Avoiding the entire financial sector now can be one strategy. Most finance companies have reported good numbers for the fourth quarter of 2020-21. However, things deteriorated after that and therefore, fourth quarter results are not of much use now. Banks and NBFCs were in the forefront of recent stock market rallies and therefore, they may take a breather till clarity emerges through the first quarter numbers. “Banking sector is expected to underperform the broader market in coming months,” says Purohit.Even if you want to remain invested in large banks, it makes sense to exit smaller banks and NBFCs. Analysts are particularly negative on three companies—IDFC First Bank, Yes Bank and Bajaj Finance. “Basel disclosures indicate slippages rate of 6% for 2020-21 for IDFC First Bank, which is on higher side compared to peers. Due to current wave, we expect slippages of 3.5% and credit cost of 1.7% in 2021-22, but should subside from thereon,” says a recent Prabhudas Lilladher report.With a gross and net NPA of 15.4% and 5.9% respectively, Yes Bank continues to face serious asset quality issues. “With the raging second wave, asset quality risk is likely to remain elevated and RBI’s refusal to allow the bank to set up a separate ARC has dashed its hope of window dressing of balance sheet,” says a recent Emkay report. Though the long term story of Bajaj Finance—one of the best balance sheets among NBFCs— is still intact, the second wave will negatively impact it in the short term. Its current high valuation is another reason why analysts want you to avoid this counter now. “We retain a sell on Bajaj Finance because its current valuation is rich,” says a recent Nirmal Bang report.

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