The banking sector has disappointed investors in the first two months of the year, with stocks of major lenders falling quite sharply.
Before the beginning of the year, the outlook on the sector was strong, with stocks tipped to be among the better performers. However, the first two months have seen a Rs 2.55-trillion wipeout in m-cap of banks. Data shows that the top 10 banks by market capitalisation have yielded negative returns as of March 1, with State Bank of India (SBI) shedding up to 12.5% year-to-date (YTD), losing over Rs 68,000 crore in m-cap.Market analysts say the sector witnessed a stellar rally in CY22, being among the top performers (yielding close to 19%). “CY23 has seen some profit-booking that has led to a correction. A couple of months back, there was optimism on interest rates having peaked, which led to concerns over margins coming under pressure in the near term,” said Varun Saboo, Head (Equities), Anand Rathi Shares and Stock Brokers.He added that strong data from the US, coupled with global inflation remaining elevated, has raised expectations of a 50-bp hike by the Fed, which should ease concerns on margins. “This is a huge opportunity as stocks have corrected sharply and are at attractive valuations.”
At the same time, it could be partly offset by the rising cost of funds, as a result of which the pace of NIM expansion may slow down. Independent market analyst Ambareesh Baliga cautioned that not only could NIMs get squeezed because of the rate hikes, the rising cost of funds may lead to a tapering off in credit growth, which could cause the stocks to lose some momentum.While the previous years saw the sector underperform because of NPA levels, CY22 saw a strong revival, he said.
“The balance sheet clean-ups led to improved earnings, thus the positive outlook on the sector. But a correction was due as the sector was overpriced,” Baliga pointed out.Chandan Taparia, head of technical and derivatives research at Motilal Oswal, agreed that the markets have understood it is a time for consolidation.
He said the Budget couldn’t provide much excitement to the sector and mixed quarterly earnings cooled the momentum down.“Few heavyweight companies have witnessed heavy selling, which has had a trickle-down impact, especially on PSU banks,” he said.On Wednesday, however, the benchmark indices snapped an eight-session losing run, with the BSE Bankex and Bank Nifty both gaining over 1%. Only HDFC Bank closed in the red, with others gaining through the session.Interestingly, both Baliga and Saboo agreed that concerns over banks’ exposure to the Adani group, which led to some weakness in PSU banks, were more of a sentimental reaction. They said the group continues to have strong assets in the form of Adani Ports, Ambuja and ACC, and though over-leveraged, the group is unlikely to default on its loans.