Selling in bank stocks to continue despite 20% fall since Feb, say analysts

Bank stocks have been among the worst hit counters during the current market meltdown. Since the beginning of February, banking shares such as ICICI Bank, SBI and Axis Bank have plunged as much as 18 per cent as against an 8-per cent decline in the benchmark S&P BSE Sensex, ACE Equity data show.

While this kind of double digit selling usually paves way for attractive entry points, this may not be true for the on-going market correction, caution analysts.

The Ukraine-Russia war, soaring Brent crude oil price, rising interest rate regime, uncertainty around sustainability of economic recovery, and the overall risk-off sentiment are some of the key overhangs that may keep bank stocks under pressure in the near future, they said.

"Ukrainian war poses a risk to the Indian economy’s revival. We had a capex-laced Budget which had improved the market sentiment, but the war in Eastern Europe and sky-high crude oil prices have put a spanner in the works. We don’t know for how long oil prices will remain elevated, or when the sanctions against Russia will be lifted. Given this, the government will have to revisit its fiscal math and may be forced to re-think its capex plans for fiscal year 2022-23 (FY23). All this will have a bearing on India’s economic activity and may affect banks' credit growth," Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services said.

Russia-Ukraine conflict impact

In a recent report, Nomura pointed out that even though the outlook for banks remains positive, a prolonged conflict-like situation would be negative for global growth, and may also slow domestic investments. This would also be a risk to loan growth expectations.

That apart, the spillover effect of crude oil prices on inflation and faster-than-expected interest rate hike is also worrying the Street. The surge in edible and crude oil prices will feed into headline inflation, which has already breached the upper tolerance limit of the Reserve Bank of India's 2-6 per cent target range.

A prolonged high inflation could fasten the rate hike regime, in India and abroad, which will push up bond yields and compress their prices. This will dent the treasury income of banks due to mark-to-market losses on the government securities held by them.

According to Emkay Global, a cut in GDP/systemic credit growth by 50bps and an increase in bond yields by 25bps due to global headwinds will affect earnings of Nifty Banks by 3-4 per cent.

Separately, bank stocks are also bearing the brunt of FII (foreign institutional investors) selling. This, too, is a result of profit booking in Indian equities post massive rally since March 2020 along with near-term growth concerns.

High institutional ownership, especially by foreign investors, is very high in Indian banks and a sell-off by them since the past few months has also seen bank stocks tumble. "Bank stocks are the first ones to crack whenever FPI/FII selling hits Indian markets as nearly a third of their assets under custody are in banks and financial stocks. Though they can bounce back after the panic selling on the bourse stops, it will be difficult for them to reclaim previous highs," said Deepak Jasani, head of retail research at HDFC Securities.

Gaurang Shah, vice president at Geojit Financial Services, too, believes the selling in bank stocks may not be over yet as the cocktail of above-mentioned factors has made the outlook uncertain. That said, he says, bank stocks are a good contrarian bet in the current market.

Source: ACE Equity