On Monday, investors dumped banking stocks after the media reports over the weekend named many Indian banks that were also facilitators in the leaked FinCEN reports obtained by International Consortium of Investigative Journalism (ICIJ) on suspicious transactions between 1999 and 2017.
What did the media reports say?
An Indian Express report citing confidential reports obtained from ICIJ, submitted by banks to the US government said that about 3,201 suspicious transactions involving $1.53 billion had complete Indian addresses linked to different entities. These are cases (including the 2G scam) already being investigated by CBI and other agencies
It also said that as many as 44 Indian banks appear in the FinCEN files primarily because these are "correspondent banks" to the foreign banks who have filed these SARs (suspicious activity reports) and include names of Punjab National Bank, Kotak Mahindra, HDFC Bank, Canara Bank, IndusInd Bank and Bank of Baroda, among others.
Nifty Private Bank plunged 3.71% and Nifty PSU Bank fell 4.39% on Monday based on the news. Bandhan Bank, RBL Bank, PNB, IDFC First Bank and Bank of Baroda were among other top losers from the index.
Outlook has remained dim for a while
Regardless of the latest events, financials has been the worst-performing sector in the Indian stock markets in 2020, declining over 30%. Concerns of piling non-performing assets (NPAs) of these financial institutions after the IL&FS fiasco only worsened after the COVID-19-led lockdown forced MSMEs (small enterprises) to shut businesses or crippled their finances.
Ailing small businesses impact banking sectors as these are among the biggest clients of medium-sized banks.
What stocks are brokerages betting on?
A top-outperforming Morgan Stanley fund's - Asia Opportunity fund - lead manager Kristian Heugh expects private banks with "strong deposit franchise" and "quality underwriting standards" to gain market share. The stocks in the fund include public sector lenders as well as private ones.
The fund is betting on HDFC Bank Ltd, looking past the short-term uncertainty and nearly 20% fall in the share price. The bank's lower cost base, coupled with "industry-leading digital capabilities," can enable it to continue taking loan and deposit market share from weak public sector banks, Heugh said, adding that the private lender has "strong" risk management processes.
The fund has also invested in ICICI Bank and Kotak Mahindra Bank.
Jefferies analysts have picked a 19-stock portfolio that they believe should be bought on dips. These include private banks and IT companies.
Among private banks, the brokerage has picked Housing Development Finance Corp (HDFC) with a target price of Rs 2,210, ICICI Bank (price target Rs 480) for relatively low stress and good capital buffers, HDFC Bank (price target Rs 1,350) for growing its quality book well despite COVID-19, IndusInd Bank (price target Rs 760) as low valuations provide entry opportunity.
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