Low earnings growth may prompt investors to move away from banks: Dhananjay Sinha

Time of India

18-07-2025

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, CEO and Co-Head Institutional Equities,, says the banking sector faces potential investor shift. Low earnings growth may prompt investors to seek sectors with stronger performance. HDFC Bank stands out with a better earnings trajectory. Structural tailwinds and cost optimization efforts are improving margins. The banking sector is currently focused on optimizing costs and overheads to enhance profitability. This strategic shift aims to navigate current economic conditions.The stock prices have corrected recently, but this sector has demonstrated good performance in terms of operational matrix. There was concern with respect to the infra spending by the government. A certain amount of containment was there. In the recent past, the government has stepped up a lot of these spending which is supportive of the wires and cables industry . And this sector has been doing really well. The correction created an opportunity. So, wires and cables is a sector that most investors are betting on. So, every dip is something that people are actually using as an opportunity. And over the last several years, I would say, the sector has been doing well.The operating performance of the banking sector shows there is a fall in the credit deposit ratio since the March levels which was at its peak. We have seen that credit growth has actually decelerated to somewhere around 9% or thereabout if you look at the overall system and there has been a sort of excess liquidity that has been there, and the RBI has also cut rates. So, the issue is all about the operating matrix and the way the banking sector can grow.A deceleration in credit growth is not very beneficial for the banking sector and with that, with liquidity being excess and RBI cutting rates, the pressure on margins would continue. I would say the earnings growth that we are projecting as a whole for the coverage company is working out to be somewhere around 1.7% year-on-year for the entire first quarter. That basically reflects there is a lack of other income support that is the fee-based income, quite apart from the fact that there is a margin compression. This is notwithstanding the fact that there was easing of the G-Sec yield and as a result, the yield curve may have given a trading profit for the banking sector as a whole. I would say that private banks had actually done well. There has been a significant revival in the investor interest in names such as HDFC Bank, Kotak Bank , etc, and even Bajaj Finance in the NBFC sector.So, a certain amount of rally was there and, the fact that there was sort of some strengthening in rupee which has given some valuation benefit out there. Going forward, the operating matrix will be very relevant. If you have 1.7% earnings growth for the banking system, it has got a very large weightage in the index, so that is something that people might start to shave off a little bit. So, it is quite possible that investors might actually switch to some other sectors where earnings trajectory is relatively more resilient so that is the view on the banking sector, stocks.Overall in our universe of coverage, HDFC Bank looks better in terms of earnings trajectory. There are certain structural tailwinds with respect to their cost of funds and with respect to them hiving off some of the low yielding assets. All that is improving the margins or at least creating tailwinds on the margins. Also, they are optimising on cost and stuff. The overall banking sector is in an optimisation mode. They are trying to draw a certain amount of profitability through optimisation of cost, overhead cost, and that is the view of the banking sector.