Abhay Agarwal On The Banking Sector's Struggles And Future Opportunities

Abhay Agarwal, Founder & Fund Manager at Piper Serica, offers insights into the recent sell-off in the BFSI sector, particularly in private and public sector banks, which was unexpected given the optimism around their balance sheets just a few months ago. He explains that his firm has not included any lenders, banks, or NBFCs in their portfolio for the last nine months due to early signs of a cyclical downturn. While the sector has seen significant growth since the pandemic, it was due for a correction, and the current challenges are part of a natural cycle rather than a structural issue. Agarwal identifies several key factors driving this downturn. Firstly, deposit growth has slowed as more money has moved to the stock market, affecting the liquidity of banks. Secondly, credit off-take has been weaker than expected, partly due to a slower capex cycle. Thirdly, the cost-to-income ratio is rising due to increasing operating expenses, such as salaries and rents, without a corresponding rise in revenue. Finally, credit quality has suffered due to mounting pressure on household balance sheets, particularly among NBFCs and microfinance lenders, resulting in a decline in collection efficiency ratios. Despite these challenges, Agarwal believes the sector will recover in the next six months, presenting good buying opportunities. He advises investors to be patient and wait for these opportunities to add high-quality stocks to their portfolios.