Rising bond yields, slow loan growth hit sentiment
Over the last month, the entire banking pack has been under pressure with the Nifty Bank index plunging by 11.3 per cent as against Nifty50’s 7.3 per cent fall.
Individually, stocks of ICICI Bank and HDFC Bank have corrected by 10-15 per cent in a month. Stocks such as AU Small Finance Bank, Bandhan Bank, RBL Bank, Punjab National Bank and State Bank of India have seen a sharper fall.
Growing bond yields in India is perceived negatively by investors abroad, forcing them to trim their exposure to the banking space. American depository receipts, or ADRs, of leading private banks ICICI Bank and HDFC Bank, too, have plummeted 15-18 per cent in a month.
Concern on MTM losses
What has triggered the underperformance? Until early January, much of the price decline in banking stocks was led by sector rotation on the part of foreign investors.
But this has changed. With bond yields spiking, fresh concerns have cropped on the impact this will have on the financials of banks in the March 2022 quarter (Q4). While a marked-to-market (MTM) loss on investments could be more detrimental to public sector banks, which draw 60-70 per cent of their ‘other income’ from this head, even their private peers won’t be unscathed as it has played a critical role in bumping up their earnings in FY22.
There are also questions around loan growth (see table). While loan growth in January seemed picture-perfect, it’s not really so rosy. Much of the retail growth lately is coming from by unsecured products. Accordingly, a report by Transunion CIBIL indicates the pool of sub-prime and near-prime borrowers were on the rise in November 2021. So, what should investors do now?
After every market fall, banking stocks were perceived as frontline stocks driving the market revival, but failed to hold up sentiments. So, it is important to take a stock-specific view going forward.
Bandhan Bank, RBL Bank and IndusInd Bank may remain impacted because of their exposure to the microfinance space. Axis Bank and Kotak Bank have adopted a conservative growth strategy which could limit the possibility of market outperformance. HDFC Bank and ICICI Bank may remain the targets of continued selling by foreign investors.
Among public sector banks, only State Bank of India and Bank of Baroda enjoy investor acceptance, though MTM losses could pinch their financials.