TREND: Lenders’ optimism drives Indian equity binge of FPIs

Friday, Nov 27, 2020


By Chiranjivi Chakraborty


MUMBAI – The domestic equity market has attracted 705 bln rupees in net foreign inflows since Oct 1, likely to be the largest ever flows in a two-month period, and it has outperformed peers across the emerging markets basket.


While a confluence of external factors have seen money pour into equities of emerging markets like India, the outperformance might be explained by the clarity emerging about the impact of the COVID-19 pandemic on the country's lenders.


Foreign portfolio investors net bought local equities worth 294.5 bln rupees in the six-week period ended Nov 15, but as much as 52% of this amount was invested in shares of listed lenders, latest data available with National Securities Depository Ltd shows.


In absolute terms, shares of banks and non-bank lenders have seen net buying of 258 bln rupees in the six-week period and the amount is likely to have increased further in the past 10 days, dealers said.


There are several factors that have aided foreign investors' buying rush in lenders. The key reason being that the September quarter earnings of lenders showed they were in much better health than was expected at the beginning of the pandemic.


In March, foreign investors had panicked and withdrew more than 200 bln rupees, the highest ever, from stocks of banks and non-bank lenders. At that time, fear was the pandemic will cripple the financial sector that was already on its knees before COVID-19 struck these shores.


As it turned out, strong capital raising activity during the pandemic months by large banks and non-bank lenders, and concerted efforts by the corporate sector to reduce debt burden meant that balance sheet of lenders was in a much better shape.


Investors seemed re-assured by these companies' commentary that the situation is much better than general expectations on the asset quality front, said analysts at Goldman Sachs in a recent note.


The government bearing the burden for the relief provided by the Supreme Court on compound interest payable by borrowers who availed moratorium on their loans, and the measures taken by the Reserve Bank of India on restructuring stressed loans also lifted confidence.


The shift in narrative around lenders from fear to hope is encapsulated in Goldman Sachs' ratings upgrade of the country's largest lender State Bank of India shares to "buy" in August. Goldman Sachs had said at the time that the bank was "a proxy of improving investor confidence".


Banks have also benefitted from the increase in the weight of Indian stocks part of the MSCI's indices mandated by the index aggregator on Nov 11. Brokerages expect that the move alone will lead to $2.5 bln in fresh FPI inflows to India before the end of this month.


Kotak Mahindra Bank, which became a new entrant in the MSCI indices, alone will attract close to $800 mln in fresh buying from exchange-traded funds that track MSCI indices.


The shift in sentiment, the increase in India's country-weight by MSCI, and under-ownership of lenders by foreign investors because of better returns offered by other sectors earlier made for a perfect catalyst.


As a result, the Nifty Financial Services index has soared 34% in Oct-Nov, outperforming the Nifty 50 by a mile. The gains were driven by shares of Bajaj Finance Ltd, Bajaj Finserv Ltd, Kotak Mahindra Bank Ltd, IndusInd Bank Ltd, ICICI Bank Ltd, SBI, Housing Development Finance Corp Ltd and HDFC Bank, which rose 30-50%.


The sustenance of the buying interest from foreign investors will now hinge on the level of deterioration in asset quality lenders see once the apex court lifts the stay on tagging of bad loans.


However, if the optimistic guidance given by most banks and non-bank lenders on asset quality and growth turns out to be accurate, foreign investors' appetite may not be satisfied yet.  End


US$1 = 73.84 rupees


Edited by Ramya J.S. D'Rozario


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