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Banking and financial services are at the forefront of economic growth in any country. They play an important role in the functioning of the economy through intermediation. To put it in simple words, the financial sector sits between savers and borrowers: it takes funds from savers (for example, through deposits) and lends them to those who wish to borrow, be they households, businesses or governments. This is exactly why the financial sector is the largest constituent of all the benchmarks with weights of 38-43% in Nifty50 and BSE-30 indices.

With so many indices, it becomes difficult for an investor to pick stocks from the BFSI sector.

Motilal Oswal’s BFSI model portfolio aims to address this gap

“The divergent stock performance of Indian financials vis-a-vis the Nifty Financial Services index highlights the need for an active stock selection strategy. This becomes even more important owing to evolving liquidity scenario, fast-changing macros, and asset quality/growth outlook,” Motilal Oswal Financial Services said in a report.

Sub-segments of BFSI

Unlike many other sectors, BFSI offers a varied play on the different sub-segments, with different underlying characteristics, on account of varied customer profiles, product offerings, and liability structures (such as gold financiers, MFI lenders, and rural-focused lenders). Banks with a strong liability franchise tend to benefit in a stressed environment. On the other hand, non-lending financials tend to perform better in an adverse lending environment. These sub-segments present an opportunity to cherry-pick stocks based on the prevailing outlook for the identified sub-segments.

Model portfolio

The brokerage firm has adopted a positive stance on the sector and expect it to outperform, supported by an uptick in economic recovery, improving asset quality, and a continued accommodative stance and relief measures by the RBI.

In the maiden BFSI Model Portfolio, Motilal Oswal Financial Services is overweight on banks and gold financiers among the lending financials.

(Source: MOFSL)

In the largecap space, ICICI Bank, SBI, and Axis Bank are the top pick. Whereas in the mid-cap space, it prefers Muthoot Finance, Cholamandalam Investment and Finance, Shriram Transport Finance and AU Small Finance. Among the non-lending financials, we prefer Max Financial and ICICI Prudential Life Insurance among the life insurers and ICICI Securities, IIFL Wealth, and SBI Cards and Payment among other financials.

Road to recovery

Motilal Oswal Financial Services estimates the loan books of private banks to grow 16%/18% over FY22E/FY23E and the loan books of large NBFCs to grow at ~12% and expect banks to gain market share from NBFCs in most segments.

After the perceived severe impact of the Covid-19 pandemic; asset quality fared far better than expected led by a sharp improvement in collection trends and lower restructuring reported by lenders. Collection efficiency in large Private banks /HFCs/Vehicle Financiers stood at 95–97%/+97%/85–95%. While collections were impacted in Apr’21 due to the rise in cases and lockdown, we believe the impact on asset quality would be limited – supported by relief measures announced by the RBI for the impacted sectors. the business momentum to pick up and estimate credit cost to normalise from FY22, resulting in earnings recovery over FY21–23E.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing)