Top 12 stocks to look at from banking & financial space after RBI panel recommendations

The Reserve Bank of India's internal working group has proposed several recommendations to revive the Indian private banking sector in a big way.

These recommendations are largely related to ownership guidelines and corporate structure of Indian private sector banks. And if these recommendations get implemented properly, then experts believe the market share of private banks could increase significantly in the coming years, but they feel the implementation may take more time.

Also, there could be a reduction in intermediation cost and it could make the banking system more efficient going ahead, according to experts.

The key suggestions by the panel are to raise promoters' cap to 26 percent from current 15 percent in 15-year period and to allow large corporate houses as promoters of banks or take significant stake in banks. For non-promoter shareholding, the uniform cap of 15 percent can be for all shareholders.

Other recommendations are NBFCs with more than Rs 50,000 crore asset can be converted into banks after 10 years, three-year track record must be enough for payments bank to be converted into small finance bank, minimum cap for licensing universal banks must be raised to Rs 1,000 crore from Rs 500 crore and minimum cap for licensing small finance banks should be raised to Rs 300 crore from Rs 200 crore etc.

"We view the RBI's panel report related to the ownership of private sector banks as progressive in nature. Suggestions for corporate/industrial houses on how to get a banking license, and allowing NBFCs (even belonging to industrial houses) above asset sizes of Rs 50,000 crore to get banking licenses would increase healthy competition, making the banking system more efficient, reducing intermediation cost, and ultimately increasing credit penetration in the system," Motilal Oswal said.

Largely there are 12 stocks which could be biggest beneficiaries if these recommendations get implemented properly in coming years, including

IDFC First Bank is also expected to be benefit if it sells the mutual fund business, experts feel.

Over the last five years, private sector banks have rapidly gained market share to around 30 percent (2020) from around 18 percent (2015).

Motilal Oswal sees this trend accelerating at a faster pace now and feels M&A opportunities may also increase in the system as corporates with deep pockets may adopt this route rather than building from scratch.

The RBI had constituted an internal working group on June 12 to review extant ownership guidelines and corporate structure of Indian private sector banks. Terms of reference included review of the eligibility criteria for individuals/entities to apply for banking license; examination of preferred corporate structure for banks and, review of norms for long-term shareholding in banks by promoters and other shareholders.

"These steps are in right direction and beneficial for the sector in the long-term but we believe these measures have played out in the recent price rally," ICICI Direct said.

The Nifty Bank index gained just 41 percent till October month from March 23's low, whereas Nifty50 and Metal itself gained 53 percent each, IT rallied 87 percent and Pharma 75 percent.

But in November, the main leader was banking sector. Nifty Bank added more than 30 percent in current month, taking the total gains of itself to over 70 percent from March lows and taking the Nifty50's gains, too, to over 70 percent from March lows.

The recent rally was also led by the banking sector Q2FY21 result. Key points which favoured expansion in valuation are (a) Improvement in collection efficiency, the majority of the banks have reported more than 90 percent collection efficiency; (b) Improvement in NIM, led by a contraction in excess liquidity and positive impact of capital raise; and (c) Improvement in asset quality owing to standstill benefit given on asset classification, said Jaikishan Parmar, Senior Equity Research Analyst at Angel Broking.

There are some recommendations with respect to Non-Operative Financial Holding Company (NOFHC) structure by the RBI panel.

The IWG recommends that NOFHCs should continue to be the preferred structure for all new ‘Universal Banks’. Further, banks currently under the NOFHC structure, which do not have other group entities within their fold could be permitted to exit said structure.

HDFC Securities believes that the IWG recommendations, in their current shape, are vague on whether the NOFHC structure applies to small finance banks (SFBs) - in case this eventually applies to SFBs, Ujjivan Small Finance Bank and Equitas Small Finance Bank will be positively impacted.