Banking stocks may continue rally on fresh foreign flows
MUMBAI: Banks have spearheaded the pre-election rally in the Indian stock market, with the Bank Nifty gaining almost 6 per cent, or 1,600 points, to record highs during last week in which the gauge posted its sharpest weekly advance in the past couple of years.
Traders are increasing bullish positions on the bank index and stock futures and options contracts — mainly Axis BankNSE 2.24 % and ICICI BankNSE 0.70 % — on expectations that these stocks will benefit the most in the wake of renewed foreign portfolio inflows. Financial services have the highest weight of 37.18 per cent on the Nifty. So, when overseas exchange traded funds pump money into a basket of Nifty index stocks, banks benefit the most.
The Nifty gained 3.5 per cent last week.
The banking index has rallied 10 per cent in the March derivatives series, but analysts believe there is more steam left in these stocks.
The surge in open interest or outstanding positions in Bank Nifty shows the high level of interest for banking stocks.
“The open interest in Bank Nifty has swelled sharply along with the up-move and the current open interest in the index is the highest seen since August of last year (2018), suggesting a long build-up. In the last week itself, more than 30 per cent open interest was added in the banking index,” said ICICIdirect in a note on Friday.
Analysts at ICICIdirect do not rule out a round of profit-booking after the sharp rise in banking stocks. The ratio of Bank Nifty to Nifty is also at its all-time high of 2.57 and could cool off to 2.55 in the coming sessions, said ICICIdirect.
“However, this decline should be utilized to buy the banking index once again,” said ICICIdirect. Most analysts recommend buying corporate banks such as Axis Bank and ICICI Bank, and are bullish on State Bank of IndiaNSE 0.18 % among the public sector banks.
The Bank Nifty index futures have seen an addition of 123 per cent in open interest since the beginning of the series.
“There is a left-out feeling in the market; so the momentum could continue until the index is above 28,888 levels. It could extend its move to about 30,000 and dips are likely to be bought into,” said Chandan Taparia, derivative analyst at Motilal Oswal.
Taparia is the most bullish on ICICI Bank and believes the stock could rise to Rs 420 in the near term and expects State Bank of India’s shares to touch Rs 310.
This would mean a potential gain of 6 per cent in ICICI Bank and 4 per cent rise in SBI shares. The Bank Nifty ended up 1.6 per cent at 29381.45 on Friday after scaling a record high of 29520.70 during the session.
“The rally in banking stocks is mostly on account of FII flows returning to emerging markets, especially India. FIIs have been the biggest investors in Indian private banks, so it is natural that they will buy them,” said Digant Haria, vice-president, research at Antique Stock Broking.
Some believe that it is not just buying by foreign investors into private banks that has made the sector a leader in the market rally. Concerns around non-performing assets (NPAs) have come down as banks have reported lower slippages and strong recoveries in the quarter ended December. Banks are also benefiting from the liquidity issues faced by the nonbanking finance companies.
Abhimanyu Sofat, head, research at IIFL, said ICICI Bank and Axis Bank could see strong profit growth due to lower slippages.
“A lot of PSU banks are likely to shift to profits from losses over the next few quarters as money comes from Essar-kind of deals. Growth in the banking sector is going to be phenomenal over the next twothree quarters because of lower NPAs,” said Sofat.
“On the liquidity side there are challenges for the NBFCs. Banks will benefit because of that, especially those from the private sector,” he added.