After a sharp fall in the share prices of HDFC Bank and other private sector lenders in the past three days, the BFSI (banking, financial services and insurance) sector weighting in the Nifty50 has slipped to a seven-year low of 32.03 per cent, down from nearly 36.6 per cent at the end of March 2023 and 34.5 per cent at the end of December 2023.
The 2019 calendar year was the high point for the BFSI sector, when its weighting in the index had risen to a record high of 40.6 per cent at the end of December.
This signals a sharp reversal in the fortunes of companies in the BFSI sector which were once among the most favoured on the bourses.
For a decade (2009-2019), retail private sector banks, non-banking financial companies and insurers together comprised the best performing sector on Dalal Street, leading to a steady rise in the BFSI sector’s contribution to the overall market.
As a result, BFSI weighting in the Nifty50 index rose from 17.9 per cent at the end of March 2009 to 37.6 per cent at the end of March 2019, before it peaked in December 2019.
HDFC Bank is the single biggest component of the benchmark indices with around 38 per cent weighting in the Bank Nifty and 11.5 per cent weighting in the Nifty50 index.
Analysts attribute the decline in the BFSI sector’s weight to a deterioration in bank earnings metrics in recent quarters.
“The profit drivers for banks and non-banking lenders have peaked out with a decline in net interest margins after years of expansion and the end of regulatory forbearance given by the Reserve Bank of India during the Covid pandemic,” said Dhananjay Sinha, co-head, research and equity strategy, Systematix Institutional Equity.
He was underweight on banks and expected them to remain a laggard with poor earnings growth.
“The credit cost for banks is rising. Also, there is a heightened competition for retail credit and there is no sign of a revival in corporate lending where banks face little competition,” Sinha added.
“We are underweight (UW) on financials.
“Banks would be vulnerable because of margin pressures after (an expected) RBI rate cut (later this year).
“The external-benchmarked mortgages would reprice downwards almost immediately, followed by short-term corporate loans.
“For most largecap banks, we (and consensus) expect FY25 to show slower earnings growth than the preceding years which would be a drag on the stocks,” wrote analysts at Emkay Global Financial Services.
Analysts also attributed the loss in the weighting of larger banks to the outperformance of small and midsize peers in recent quarters.
“Within banking itself, investors’ money has moved to smaller public sector and private sector banks and away from large private sector banks that are part of the benchmark indices,” says G Chokkalingam, founder & CEO, Equinomics Research.
This, he said, has created a situation where smaller banks are outperforming the broader market even as top banks are laggards.
The BFSI pie in the market has been eaten up by sectors, such as automobile, pharmaceutical, FMCG, and infrastructure, besides IT services.
For example, automobile companies’ weighting has now increased to about 6.65 per cent from 4.8 per cent at the end of March 2022.
Similarly, the FMCG weight has surged 11.9 per cent from 9.9 per cent and pharma contribution has increased to 3.4 per cent from 3.3 per cent.
Larsen & Toubro has been a big gainer and its index weighting is now 5 per cent against around 3 per cent at the end of March 2022.
However, according to analysts, it would be tough for the overall market to remain buoyant if the BFSI sector continues to struggle given the sector still has the highest weighting in the index, more than double that of the next big sector — IT services.