Recent correction may be an opportunity to enter bank stocks

PSB stocks have outperformed private rivals, and momentum looks strong

The largest sectoral component of the Nifty50, the banking and financials sector, has a weighting of 37.2 per cent, with banks accounting for over 25 per cent.

Banking itself is tracked by the Bank Nifty, covering the largest players, while two other indices track private banks and public sector banks (PSBs). The Nifty is highly correlated to the banking sector, and specifically the Bank Nifty, with the six largest stocks in the Bank Nifty all included in the Nifty.

The banking indices have far outperformed the Nifty over the past year, past month, and past week. The Nifty has moved 55 per cent in the last year, 2 per cent in the last week, and it lost 0.08 per cent in the last week.

The Bank Nifty has returned 70 per cent in the last year, 7.1 per cent in the last month, and 3.4 per cent in the last week. The private banks index has returned 58 per cent in the last year, 8.6 per cent in the last month, and 2.9 per cent in the last week.

The PSB index has returned an amazing 125.5 per cent in the last year, 24 per cent in the last month, and 6.4 per cent in the last week. The private banks have higher weight in Bank Nifty and Nifty. Hence, the Bank Nifty has underperformed the PSB index.

Looking at the 30-day performance of listed banks that have reported Q2 results, the returns are a mixed bag. IDBI Bank leads in share performance with 29 per cent return, while Canara Bank, Federal Bank, Bank of Maharashtra and PNB have all returned over 20 per cent. Indian Overseas Bank also has 11.7 per cent returns, while ICICI Bank has returned 14.1 per cent.

At the other end of the spectrum, Axis Bank (-1 per cent), CSB (-3.3 per cent) and South Indian Bank (-4.4 per cent) have delivered negative returns. Among the bigger banks, HDFC Bank has underperformed with a return of 1.08 per cent. YES Bank has returned 1.2 per cent.

Technically speaking, the stock market has rewarded the turnaround stories more during this last month. While HDFC Bank had decent results and ICICI Bank had excellent results, both big institutions already had strong balance sheets. The share price returns for banks with weaker balance sheets that delivered improved Q2 results has been higher.

One key factor, however, is that we are waiting on two major PSBs’ Q2 results — SBI and Bank of Baroda. However, BoB has hit fresh highs ahead of their results, which shows optimism. SBI is also expected to deliver improved results.

These two bank shares have technical strength and, based on that, the market expects good Q2 results in these three major PSBs. SBI is part of the Bank Nifty, so it could bring fresh impetus to the Bank Nifty.

Since the PSB index contains more banks that are yet to report Q2 results, it has more chances of volatility. However, the momentum here too looks strongly bullish.

The small correction in the recent past may be an opportunity to enter the sector, with a short- to medium-term perspective. There’s support for the Bank Nifty at around 39,900-40,000, at about 2.5 per cent off the current price. The next strong support is between 39,300-39,500.