At record high today! WhiteOak Capital lists 3 reasons to invest in banking and financial services space

The Nifty Bank and Nifty Financial Services indices surged 2 percent in intra-day trading today, reaching record highs. This surge was primarily driven by heavyweight private sector lender HDFC Bank after foreign institutional investors (FIIs) cut their shareholding in the stock to below 55 percent. Analysts expect this reduction to lead to increased MSCI inflows.

Nifty Bank breached the 53,000 level to touch a new high of 53,256.7. Meanwhile, the Nifty Financial Services index hit its record high of 23,991.45 in today's deals. Both these 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 & Financial Services Sector. It has listed 3 reasons for its bullish recommendation - Long Term Wealth Creator, Relative Attractiveness, and Growth Prospects.

"Financial Services is one of the economy’s most essential and influential sectors. The Financial Services sector significantly contributes to economic development, serving as a primary player in capital allocation, risk management, and financial inclusion," said the note.

It further pointed out that historical data shows that the financial services index represented by Nifty Financial Services TRI has outperformed key broader market indices represented by Nifty 50 TRI and Nifty 500 TRI in the past. This index has done better than broader market indices in most calendar years. However, the index has been struggling in the last five years, noted WhiteOak.

"The financial services sector faced various challenges globally and domestically in the last two decades. However, the current underperformance of the Nifty Financial Services Index is caused by various factors such as global economic uncertainty, significant outflow by FPIs, regulatory changes/restrictions, etc. Valuation of Financial services is relatively attractive to the broad markets," it explained.

Moreover, it added that private banks are also trading at low valuations, near the COVID-19 pandemic levels. The banking sector’s profitability has improved, and healthy balance sheets support it.

Furthermore, the report pointed out that financial services remain a major PAT contributor to the Nifty Total Market index. India’s rising weight in the MSCI Emerging index may also lead to increased foreign investments. This may boost market liquidity, and enhance capital inflows, supporting economic growth and benefitting the financial services sector.

Let's take a look at the 3 reasons:

1) Long term wealth creator

Whiteoak stated that the financial services sector significantly contributes to the economy's long-term growth by facilitating efficient capital allocation and supporting business expansion, innovation, and job creation. The sector is evolving rapidly in India and represents a structural long-term theme. It includes various interconnected sub-sectors such as banks, mutual funds, insurance, fintech, stock-brokers, and wealth managers, which are expected to grow faster than the overall economy in the long run. The Nifty Financial Services TRI has outperformed the broader market indices, Nifty 50 TRI and Nifty 500 TRI, by approximately 3.2 percent and 2.5 percent, respectively, since its inception. Historically, for a 10-year investment period, the Nifty Financial Services TRI has outperformed the broader market 98.7 percent of the time for lump-sum investments.

2) Recent underperformance of the theme

As per the report, the Nifty Financial Services TRI has done better than broader market indices in most of the calendar years. However, the index has been struggling in the last five years. It has underperformed in four out of the previous five calendar years including CYTD 2024. Over the last two decades, financial services have faced various challenges globally and domestically. However, the current underperformance of Nifty Financial Services TRI over Nifty 50 TRI is the highest in last fifteen years, it noted.

WhiteOak attributes the underperformance of Nifty Financial Services TRI to substantial outflows by FPIs. Despite positive sector earnings, FPIs have been divesting from the domestic market. In May 2024, FPIs sold $3.068 million out of a total of $10.29 million (approximately 33.5%) invested in financial services. WhiteOak points to reasons such as geopolitical tensions, strong US treasury bonds, and uncertainty surrounding election outcomes as drivers of this outflow.

WhiteOak also highlighted that the Nifty Total Market index monitors the performance of 750 stocks across various segments—large, mid, small, and microcap—through a unified index. In this index, the financial services sector holds a market cap weight of 23.8 percent, yet it contributes significantly more, accounting for 36.7 percent of the total profit pool. This disparity indicates that in FY 2024, the financial services sector's contribution to Profit After Tax (PAT) exceeds its market cap weight, underscoring its relative attractiveness.

3) Valuation perspective & growth prospects

WhiteOak further observed that private banks are currently trading at valuations that are nearing the lows observed during the COVID-19 pandemic. Despite facing numerous challenges, these banks present a compelling investment opportunity due to their attractive valuations and promising prospects for earnings growth. This valuation level suggests that there may be significant potential for upside as market conditions stabilise and operational efficiencies improve within the sector.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.