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On This Day - 7 AUGUST 2020
Banking Stocks Are in a Sweet Spot Again

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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