SBI, HDFC Bank: Here is why bank stocks rallied up to 7% on Monday

Illustration: Ajay Mohanty
Private banks and select public sector banks were the top index contributors at the bourses on Monday as investors rotated funds towards the sector as a sign of value-based buying. Eight of the top 10 contributors towards BSE barometer Sensex's gains today were from the banking and financial space including HDFC, HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank, SBI, Kotak Mahindra Bank, and Bajaj Finance.

Individually, shares of IndusInd Bank jumped nearly 8 per cent to Rs 960 apiece on the BSE in the intra-day trade before ending 7 per cent higher. Those of SBI, meanwhile, leaped 7 per cent to Rs 385 in the intra-day deals but ended 6 per cent up. HDFC Bank, ICICI Bank, Axis Bank, Bajaj Finserv, and HDFC ended higher in the range of 2.5 per cent to 4.5 per cent as against a 1.74 per cent rise in the benchmark S&P BSE Sensex. On the National Stock Exchange, the Nifty Bank and the Nifty Financial Services indices were settled 4 per cent and 3 per cent higher, respectively, ruling as the top performing sectoral indices. 

Analysts attribute this sudden investor interest to the sector's recent underperformance and the resultant sectoral rotation. Over the past two weeks, only three bank stocks -- AU Small Finance Bank, RBL Bank, and SBI -- outperformed at the bourses, rising between 2.5 per cent and 3.5 per cent on the NSE as against a 1.25 per cent rise in the frontline Nifty50 index, ACE Equity data show. 

That apart, while ICICI Bank and The Federal Bank gained 1 per cent and 0.25 per cent, respectively, all other Nifty Bank constituents declined in the range of 0.11 per cent and 12 per cent. The Nifty Bank index too slipped 0.31 per cent, data show.

"The current buying in the sector is largely due to sectoral rotation as there aren't any specific fresh triggers for the sector... Credit growth, reported bad loans in the March quarter, and macro-situation are same as before. Therefore, today's buying can't be attributed to a specific reason," says Deepak Jasani, head of retail research at HDFC Securities. 

Another section of analysts opine that Monday's rally in banks is a sign of investors digesting decline in Covid-19 cases. "On Monday, India reported 281,386 fresh cases taking total infections to 24,965,463. New cases fell below 300,000 for the first time in 25 days as the country seeks to scale up vaccinations. Investors are seeing this as an early sign of Covid cases peaking out which could limit the dent on the financial sector," says Ajit Mishra, VP Research at Religare Broking.

The second wave of infections in India has been several times more virulent than the first. While there is no surety about the infection trajectory, the current lockdown now is restricting movement of people more than goods. High-frequency data show that the second wave is impacting India's economic activities, but the extent is far less than in the initial days of the pandemic as most economic activities are now allowed with some restrictions along with faster technology adaptation, innovations, productivity improvements and support from the government. 

"The second wave of infection is likely to soften India's GDP and corporate earnings growth in FY22 without any major impact on longer-term prospects. This may cause near-term volatility in the Indian equity market and a temporary outflow of foreign portfolio investment. Yet, barring unforeseen negative developments, a large equity-market correction looks unlikely. We expect no major inflationary risk in FY22, and this would aid continuation of the easy-monetary policy and low interest rate. Therefore, we continue to prefer financials as an investment theme," says Sujan Hajra, chief economist at Anand Rathi Shares.

On a year-to-date basis, bank stocks have traded mixed at the bourses. Shares of IDFC First Bank, SBI, ICICI Bank, PNB, Axis Bank, and AU Small Finance Bank have advanced between 10 per cent and 46 per cent on the NSE while those of Kotak Mahindra Bank, HDFC Bank, Bandhan Bank, and RBL Bank have declined up to 30 per cent. In comparison, th Nifty50 and the Nifty Bank indices are up 5 per cent and 3 per cent, respectively. 

"Q4 earnings were largely in-line with expectations. Moreover, concerns that the current restrictions may not have a significant impact on the growth are playing out. Therefore, what we are seeing in the financial space is value-based buying... If the situation on the moratorium front remains curtailed and if the NPAs don't rise significantly in Q1/Q2 of FY22, then we would be in a position to say that worst is behind for the sector," adds Gaurang Shah, senior VP at Geojit Financial Services.



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