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.
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.