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Record high today! WhiteOak Capital lists 3 reasons to invest in the banking and financial services sector
The Nifty Bank and Nifty Financial Services indices rose 2% in intraday trade today, hitting record highs. The gain was mainly driven by private sector heavyweight lender HDFC Bank after foreign institutional investors (FIIs) cut their holdings in the stock to below 55%. Analysts expect the reduction to lead to higher inflows into MSCI.
Nifty Bank surged above the 53,000 level to hit a fresh high of 53,256.7. Meanwhile, the Nifty Financial Services index hit its record high of 23,991.45 in today’s trade. Both the indices have jumped over 10 percent in 2024 YTD and around 18 percent in the last one year.
In a recent note, WhiteOak Capital Mutual Fund advised investors to consider investing in the Banking and Financial Services Sector. It listed 3 reasons for its bullish recommendation – Long-Term Wealth Creator, Relative Attractiveness, and Growth Prospects.
“Financial Services is one of the most essential and influential sectors of the economy. The Financial Services sector contributes significantly to economic development by serving as a key player in capital allocation, risk management and financial inclusion,” the statement said.
He further highlighted that historical data shows that the financial services index represented by Nifty Financial Services TRI has outperformed the major broader market indices represented by Nifty 50 TRI and Nifty 500 TRI in the past. This index has performed better than the broader market indices in most calendar years. However, the index has struggled in the last five years, WhiteOak noted.
“The financial services sector has faced several challenges globally and domestically in the last two decades. However, the current underperformance of the Nifty Financial Services Index is driven by multiple factors such as global economic uncertainty, significant outflow of FPIs, regulatory changes/restrictions, etc. The valuation of financial services is relatively attractive to the broad markets,” he explained.
Furthermore, he added that private banks are also trading at low valuations, close to COVID-19 pandemic levels. Banking sector profitability has improved, and healthy balance sheets are supporting it.
Additionally, the report highlighted that financial services continues to be a major PAT contributor to the Nifty Total Market Index. India’s increasing weight in the MSCI Emerging Index could also lead to increased foreign investment. This could boost market liquidity and increase capital inflows, supporting economic growth and benefiting the financial services sector.
Let’s take a look at the 3 reasons:
1) Long-term wealth creator
Whiteoak said the financial services sector is a significant contributor to the long-term growth of the economy by facilitating efficient allocation of capital and supporting business expansion, innovation and job creation. The sector is evolving rapidly in India and represents a long-term structural theme. It includes several interconnected sub-sectors such as banking, mutual funds, insurance, fintech, stock brokers and wealth managers, which are expected to grow faster than the overall economy in the long term. The Nifty Financial Services TRI has outperformed the broader market indices, Nifty 50 TRI and Nifty 500 TRI, by approximately 3.2% and 2.5%, respectively, since its inception. Historically, over a 10-year investment period, the Nifty Financial Services TRI has outperformed the broader market 98.7% of the time for lump sum investments.
2) Recent underperformance of the theme
According to the report, the Nifty Financial Services TRI has outperformed the broader market indices in most calendar years. However, the index has been struggling in the last five years. It has underperformed in four of the previous five calendar years, including CYTD 2024. Over the past two decades, financial services have faced several global and domestic challenges. However, the current underperformance of the Nifty Financial Services TRI over the Nifty 50 TRI is the highest in the last fifteen years, it noted.
WhiteOak attributes the underperformance of the Nifty Financial Services TRI to substantial outflows by FPIs. Despite positive earnings from the sector, FPIs have been disengaging from the domestic market. In May 2024, FPIs sold $3,068 million out of a total $10,29 million (approximately 33.5%) invested in financial services. WhiteOak points to reasons such as geopolitical tensions, strong US treasuries and uncertainty surrounding the election results as drivers of this outflow.
WhiteOak also highlighted that the Nifty Total Market Index tracks the performance of 750 stocks across segments — large, mid, small and microcap — through a unified index. In this index, the financial services sector holds a market capitalization weight of 23.8% but contributes significantly more, accounting for 36.7% of the total profit pool. This disparity indicates that by FY24, the financial services sector’s contribution to Profit After Tax (PAT) exceeds its market capitalization weight, underscoring its relative attractiveness.
3) Valuation outlook and growth prospects
WhiteOak further noted that private banks are currently trading at valuations that are approaching the lows seen during the COVID-19 pandemic. Despite facing numerous challenges, these banks present an attractive investment opportunity due to their attractive valuations and promising earnings growth prospects. This level of valuation suggests that there may be significant upside potential as market conditions stabilize and operational efficiencies improve within the sector.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of Mint. We advise investors to consult certified experts before making any investment decisions.
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