Bank stocks fall up to 40% since Budget. Is it a good time to buy?

The overall economic slowdown and the surcharge-related concerns for foreign portfolio investors (FPIs) amid weak global cues cast its shadow on the market sentiment, especially the banking stocks that have taken a hard knock since the presentation of the Union Budget on July 5. Given the developments, analysts say the road ahead for these stocks remains challenging till there is a pick-up in the economic sentiment and clarity on government policy.

“There are legacy issues with banks, especially the ones in the public sector domain. One cannot paint the entire sector with the same brush. The non-performing loan issue is now getting addressed, which is expected to peak out in the current financial year 2019 – 20 (FY20). This should lessen the amount needed for provisioning and aid overall profitability” says G Chokkalingam, founder and managing director at Equinomics Research.

As regards June 2019 quarter earnings, weakness in core performance and lower investment gains for SBI and BoB, asset quality pressure for YES Bank, Axis Bank and higher than expected provisions for ICICI Bank led to aggregate earnings being 21 per cent below expectations, say analysts. 

Private Bank's loan growth moderated to around 16 per cent – an eight quarter low and was driven by softness in auto and unsecured retail loans. For large private banks, net interest margins (NIMs) were largely in-line but for mid-sized banks higher pressure was visible. With reduction in policy rates, ample liquidity and nudge by government to lend, analysts expect pricing power to weaken and could pressurize NIMs going ahead.

“Q1FY20 witnessed the steepest de-growth in Q1 capital expenditure since the National Democratic Alliance (NDA) came to power in 2014, which adversely impacted liquidity in the banking system. Also, election related uncertainty amongst consumers must have definitely had an impact. However, liquidity has bounced back to surplus in Q2 most likely driven by expansion in government spending and reversal in growth of currency in circulation,” wrote Vinod Karki of ICICI Securities in a co-authored report with Ravin Kurwa.

Since the presentation of the Budget, while the Nifty50 index has slipped around 7.5 per cent, the Nifty Bank index has lost over 10 per cent, ACE Equity data show. The Nifty Private Bank index and the Nifty PSU Bank indices, too, have slipped over 9 percent and 21 per cent respectively during this period.

So, are bank stocks a good buy at the current levels?

Chokkalingam of Equinomics Research suggests investors remain selective and buy where there is earnings visibility. Government stimulus can help, but should not prove to be a short-term measure.

“The government should address the economic slowdown issue and not merely the sentiment issue. The former will automatically help improve sentiment, albeit over time. PSU banks can outperform their private counterparts over the next few months in case the market sentiment improves and the non-performing asset (NPA) issue peaks out in FY20,” he says.

Most PSU banks have underperformed the markets since the presentation of the Union Budget with Indian Bank, Oriental Bank of Commerce (OBC), Allahabad Bank, Bank of Baroda (BoB), State Bank of India (SBI), Canara Bank and Punjab National Bank (PNB) slipping 17 per cent to 30 per cent. RBL Bank tops the losers list with a fall of 40 per cent. IDFC First Bank and Kotak Mahindra Bank were the only two counters that gave a positive return during this period.

A K Prabhakar, head of research at IDBI Capital is bullish on Axis Bank, ICICI Bank and HDFC Bank and suggests investors can use the fall to buy these stocks from a medium-to-long term perspective.

“The fall in private banks is more to do with the surcharge issue proposed in the Budget. FPIs hold a sizeable chunk in private banks and if the government addresses their concerns, these stocks can easily outperform the market,” he says.