Banking stocks see strong gains, Bank Nifty rallies 11% in three days

Banking stocks are not alone in getting support due to monthly expiry of derivatives contracts
Banking stocks have seen strong gains this week, with the Nifty Bank index surging nearly 11 per cent in the last three sessions (starting May 26). In comparison, the Nifty has risen just 5 per cent.

The gains follow huge selling pressure and the consequent under-performance of banking stocks since the beginning of March. The financial sector, banks, and non-banking financial companies (NBFCs) are seen as the worst-hit by the lockdown.

Therefore, the Nifty Bank had lost 41 per cent between February 28 and May 22, compared to a 19 per cent fall in the Nifty. Some individual bank stocks saw bigger losses, ranging from 45-52 per cent; IndusInd Bank lost nearly 70 per cent during this period.

Deepak Jasani, head (retail research) at HDFC Securities, says: “There were some institutions selling financial stocks over the last month and a half. The sale reportedly ended a week back. At these prices, some other institutions felt the fall was much more than warranted, and hence we have seen them buy, leading to the recent uptick.”
A lot of short-selling also took place when delivery sales were happening. Once the delivery-based selling stopped, these shorts also came in to cover their positions, consequently pushing up prices, Jasani added.

G Chokkalingam, founder of Equinomics Research & Advisory, shares similar views. “The rally in banking stocks was not due to any change in outlook for the sector, but because of short-covering, given the expiry of monthly derivatives (on the last Thursday of the month derivatives).”

 

 
Banking stocks are not alone in getting support due to the monthly expiry of derivatives contracts, which happens on the last Thursday of the month. Their heavy weight in leading indices and high beta makes them popular. Most experts, however, do not expect the rally to sustain. Outlook for the sector is still weak, and this rally indicates the divergence between stock performance and earnings, adds Chokkalingam.

The Street is worried about the asset quality of banks and NBFCs, despite the lower interest rates and 3-month extension of the moratorium by the RBI.

“We think the fundamental issues (concerns) will keep cropping up. Only when the lockdown is fully lifted will we be able to gauge the full impact on asset quality and banking stocks,” said Jasani, adding that the market could see a further rise with more people wanting to participate, though at higher levels the selling is expected to resume. In fact, extension of the moratorium will only defer the asset quality check in banks, thus making investors jittery. This is why the Nifty Bank shed about 3 per cent soon after the RBI’s announcement, on last Friday.
Concerns are not limited to the lockdown. “The asset quality pain will, in turn, lead to a dearth of growth capital for banks once things normalise. Given the situation where valuations are so low, raising funds could be an issue for banks, mostly state-owned,” says an expert from a foreign broking house.

 
Recently, some foreign brokerages and rating agencies estimated capital requirement by banks at $20-50 billion, due to expectations of higher delinquencies.

News regarding fund raising by private banks (Kotak Mahindra Bank, Axis Bank, and IDFC First Bank) has also given some comfort to investors. In fact, the strong gains in Nifty Bank this week have been led by private banks (Axis Bank, IndusInd Bank, HDFC Bank, ICICI Bank and Bandhan Bank).

Sanjiv Bhasin, director at IIFL, is positive. “The economy is re-opening slowly, as airlines and railways have been re-started. We are not bearish on banks and believe consumption will revive sharply once things normalise, and factors such as a good Rabi output and monsoon should support overall consumption,” he said.


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