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.

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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.

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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 tradingview.com. 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.

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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)

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

PREMKUMAR R

Aug 14, 2020

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

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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 "

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Prabhakar Rao

Aug 7, 2020

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