Why are FIIs buying bank stocks, and will this momentum sustain?

Analysts believe a likely pick up in credit growth and hopes of a rate cut by the Reserve Bank of India should keep the momentum alive in bank stocks.

Foreign institutional investors (FIIs) have been buying bank stocks aggressively in the last few sessions, as per the NSE futures and options (F&O) trading data. In terms of contracts, the total index futures bought by the FIIs hit 56,911 on Wednesday. Among this, the Nifty Bank alone accounted for 56,593 longs, while Nifty futures another 3,028 contracts.

In value terms, the FIIs were net buyers of index futures to the tune of Rs 4,356.46 crore on June 19; which included net buying of Bank Nifty futures contracts worth Rs 4,3070.54 crore. The FIIs added Nifty futures to the tune of Rs 179.21 crore; while were net sellers in Midcap Nifty futures on Wednesday.

As a result, the Nifty Bank index broke past its previous peak to hit a new high of 51,957 levels on Wednesday, and mostly held its ground amid a volatile trade on Thursday.

So what's luring the FIIs to bank stocks, and will this momentum sustain?

The banking and financial services (BFSI) sector, according to Kranthi Bathini, director equity at WealthMills Securities, is a strong proxy for India's growth. The FIIs, he said, continue to believe in the 'India growth' story and hence this sector is always on investor's radar.

“That apart, the stocks had been subdued for quite some time now. So, they are catching up. A pick up in credit and a rate cut by the Reserve Bank of India (RBI) over the next few months should also keep the momentum alive in bank stocks,” he said.

From a low of 46,077 levels hit on June 4 when the Lok Sabha election results were announced, the Nifty Bank index has surged over 11 per cent to hit the 51,000 mark for the first time ever in trade on Wednesday.

Bank of Baroda (BoB), IDFC First Bank, The Federal Bank and Bandhan Bank have been the top gainers in this period, rallying 12 per cent to 14.5 per cent since June 4, ACE Equity data shows.

Among the lot, analysts at Macquarie prefer private banks and expect them to report healthy return on assets (ROAs) and return on equity (ROE) in the 16-18 per cent range over the next three years and maintain a steady power of compounding stories.

“Private Banks are less affected by expected credit loss (ECL) regulations and carry contingent buffers (most of them); we do not see any adverse asset quality outlook. A delayed rate cut cycle further cushions net interest margins (NIMs) for them in the near-term. PSU banks will see falling ROEs driven by normalisation of credit costs. There is additional risk of ECL impact, which we are yet to factor in our earnings,” wrote Suresh Ganapathy and Punit Bahlani of Macquarie in a recent note.

Technically, the Nifty Bank index is likely to test the super trend line resistance at 52,090 levels on the daily chart. The key momentum oscillators on multiple time frames are favourably placed. Hence, the Bank Nifty may attempt to take out the resistance in the near-term, analysts said.

On the upside, the index can potentially rally to 54,500 levels, with interim resistance seen around 53,300 and 52,100, suggests the yearly Fibonacci chart. The medium-term chart, too, suggests that the Nifty Bank index is likely to remain positive as long as it sustains above 50,850 levels.

“Nifty Bank reached extreme levels on the day of the weekly expiry this week. We may witness range-bound activity within the 51,200 and 51,700 range. A drop below 51,200 may lead to further declines to 51,000 or 50,750. Bullish momentum will continue if it surpasses 52,000 levels,” said Shrikant Chouhan, head of equity research at Kotak Securities.