Investors preferred public sector banks (BPSUs) to private sector banks. BPSUs largely finance institutional and corporate borrowers and private sector banks are known for catering retail credit needs. Despite strong credit offtake, stocks of private sector banks did not do well. There is a reason. Private sector banks were richly valued compared to BPSUs. In a high interest rate regime, value conscious investors preferred to stick to BPSU. The PSU rally also improved the sentiment around PSU bank stocks. However, these stocks have a relatively low weight (around 15%) in the Nifty Bank index. Hence the positive impact on Nifty Bank Index was not as much.
The largest stock in the Nifty Bank Index – HDFC Bank–with 29% weight remained under pressure through the year due to a variety of reasons. Investors have concerns about the challenges related to compliance and funding post the merger of HDFC Bank with its parent: Housing Development Finance Limited (HDFC). In the past one year, HDFC Bank’s shares have lost 10.3%.
Another important reason for weak performance of banks’ stocks is the regulatory actions by the Reserve Bank of India. RBI slapped fines to many lenders due to slippages in the areas of know-your-client, risk categorisation, and provisioning among others. Though, fines looked small in the context of the quantum of profits of banks. RBI also made a few banks stop onboarding new clients and selling new credit cards. These actions impacted stock prices of banks. Investors also factored in lower earnings from other banks offering similar products, anticipating similar regulatory actions. These facts turned investors cautious.
In contrast to this, stocks from auto, power and energy sectors did well and lifted the returns offered by the Nifty 50 index. Among constituents of the Nifty 50 Index, Bajaj Auto, National Thermal Power Corporation (NTPC) and Tata Motors gained more than 100% in the past one year. All in all, this was not a year for banking stocks. Even Q4 numbers announced by HDFC Bank were below expectations. However, things are expected to change for the better going ahead.Going forward, as net interest margins (NIM) of banks stabilise due to increasing deposits and credit offtake, profitability of banks should improve. If inflation comes down and interest rates are cut towards the end of the current year, then it should improve banks’ earnings. This can trigger upward movement in the Nifty Bank index.In the near term, geo-political tensions in the Middle East and the Lok Sabha elections are the two events which could trigger volatility in the broad markets. The Nifty Bank Index should get a strong support at 46,950 and then at 45,500. A close above previous high of 49,057, should take the Nifty Bank index to a new high of 51,300 if possible.
On the Nifty 50 index, 21800 should act as a strong support. If the Nifty 50 index does not break it and manages to stay above the psychologically important level of 22,000, then the Nifty 50 index should see an upside of 22500-22800. A new high around 23,150 is possible. However, a break below 21,800 will take nifty 50 to 21,250 and 20,800 levels.