Banking Stocks Are in a Sweet Spot Again

Aug 7, 2020

Apurva Sheth, Editor,Profit Hunter Pro

RBI Governor Shaktikanta Das kept the policy rates unchanged yesterday.

But he announced a series of other measures which could address issues of stress in the banking system.

The RBI allowed a one-time restructuring of loans without classifying them as Non Performing Assets (NPAs). The central bank also decided to form an expert committee headed by former ex-ICICI Bank CEO, KV Kamath, to suggest a resolution framework for accounts under stress.

That's not all.

Medium Small and Micro Enterprise (MSME) loans that were standard on 1 March, 2020, will also be allowed for restructuring.

The loan to value (LTV) for gold loans will be increased from 75% to 90%. This means banks can disburse more loans for the same quantity of gold.

--- Advertisement ---
FREE Event on Equitymaster's New Project

On May 17, we are holding a FREE event to reveal Equitymaster's Great Indian Wealth Project.

At this event, we'll reveal the details of your first stock for a potential Rs 7 crore in long-term wealth.

Seats for this event are filling up fast.

Since there are limited seats, we urge you to register at the earliest.

Click here for free sign-up

These measures by the RBI are steps in the right direction. But will it boost sentiments in the banking sector?

I'll try to address this question. Here's a chart I showed you a few weeks ago in May.

The benchmark NSE Nifty is down about 8% this year. But the Bank Nifty, which tracks some of India's biggest listed banks, is down about 32%.

2020 Performance of Bank Nifty and NSE Nifty


Nifty and Bank Nifty were moving in tandem until markets bottomed out on 23 March. The Bank Nifty has underperformed Nifty since then and continues to lag.

Discover Now: One Stock for Potentially Life-changing Gains

Investors and traders aren't willing to touch them even with a 10 feet pole.

But I believe this could change soon. Check out this chart.

Ratio Chart of Bank Nifty to Nifty


This is a ratio chart of Bank Nifty to Nifty. Here I have divided the closing prices of Bank Nifty by the closing prices of the Nifty. It shows how Bank Nifty is performing relative to Nifty.

(You can easily plot this chart on Just type - BANKNIFTY/NIFTY in the ticker box)

A rising ratio line means Bank Nifty is outperforming Nifty. A falling ratio line means it is underperforming.

--- Advertisement ---
How to Earn a Fortune in Gold, the Smart Way

Gold is on 'the verge of a decadal run' says Vijay Bhambwani, India's #1 Trader and Editor of Fast Profits Daily at Equitymaster.

He says gold has the potential to generate staggering gains in the coming years...And those who are betting on gold right now will hit the jackpot.

But wait.

While gold is an attractive investment destination, there's a very specific way to play this opportunity...

A way that ensures you rake in maximum profit and perhaps hit the jackpot...while minimizing potential pitfalls. Thankfully, Vijay - India's #1 Trader - can guide you step-by-step in the upcoming gold rush and help hit the jackpot just at the right time.

Sure, you don't want to be an average trader. That's not how you make a fortune.

Here's how you can get Vijay's guidance...

It is important to remember that a rising ratio line does not necessarily mean that Bank Nifty is rising and Nifty is falling. It simply means, Bank Nifty is outperforming Nifty. This could be that both are falling but Bank Nifty is falling less than Nifty.

You will notice in the chart, Bank Nifty was outperforming Nifty for a long time, since 2014.

But earlier in February 2020, the ratio dropped like a rock. The ratio dropped from a high of 2.67 to a low of 1.90 by May 2020.

All the major corrections in the ratio since 2013 have found support around 1.90 levels. The ratio rebounded from this level in May and even crosses 2.10 by June. That's an outperformance of more than 10% in a month.

And it's testing the same levels once again.

It's forming a 'W' bottom also known as double bottom. If the ratio holds above 1.90 then it could signal a reversal from here.

This could provide an excellent opportunity to traders in the banking space as several stocks are still languishing and have scope for upside.

The risk to reward ratio is certainly in favour of buyers. Banks are indeed in a sweet spot with the regulator's support and favourable price action.

Watch out for opportunities in this space.

Warm regards,

Apurva Sheth
Senior Research Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Join Richa Agarwal at the Rebound Riches Summit this evening at 5pm. Richa will show you the best smallcaps you can buy now. Register for free here...

Recent Articles

The Key to Profit from India's EV Revolution May 7, 2021
Stocks you must consider investing in before buying your first electric vehicle.
Are the Stock Markets Deaf to Covid Agony? May 6, 2021
Why are markets discounting the economic impact of Covid?
Why Warren Buffett Recommends Index Investing Over Berkshire Hathaway May 5, 2021
How to approach wealth generation and management in the time of meme stocks.
My Latest Recommendation Has the Perks of Being Buffett's Favourite and an Electric Vehicle Opportunity May 4, 2021
Which company from the EV ecosystem should you bet on?

Equitymaster requests your view! Post a comment on "Banking Stocks Are in a Sweet Spot Again". Click here!

3 Responses to "Banking Stocks Are in a Sweet Spot Again"


Aug 14, 2020

Very good analysis. It made for interesting reading even though it was a short article. Thanks.


Sandesha Laad

Aug 8, 2020

One has to review the the level of loans under moratorium today in the wake of COVID-19 and to which industries the loans have been given. Would restructuring of loans warrant a change in the way Gross NPAs and Net NPAs are being reported. Whilst the move by RBI would help the banks tide over the current scenario, it requires a significant change in approach adopted by banks to build confidence in investor community so that they have confidence in the financial performance of banks reported and the way ahead as Fee based income growth for most banks seems to be higher than the bread and butter revenue of interest earned from various loans which is a cause of concern in todays time. Also very few banks were providing for more than 75% of their bad loans as provisions hence the real picture of sectorwise lending should be made mandatory, how much of that has become NPA, how much of that has been considered as provision for bad and doubtfull debts should be clear from quarterly financials reported by banks to all stakeholders. This reporting should be certified by independent professional firm of CAs/ICWAs/CS apart from the appointed Statutory Auditors so as to prevent any conflict of interest and same time make banks more accountable in the way the results are declared . Once this is done, faith in banking stocks would be much higher than what it is at the moment. Hence I feel investing in bank stocks is tricky at the moment and if the above is done then we might conclude going ahead that "Banking Stocks are in a Sweet Spot Again "


Prabhakar Rao

Aug 7, 2020

Please send your recommendations

Equitymaster requests your view! Post a comment on "Banking Stocks Are in a Sweet Spot Again". Click here!