Gush of institutional funds into banking stocks likely to taper

Rerating cycle may have neared its end as much of the positives are well-priced in

Institutional flows — both domestic and foreign — are reportedly the driving force behind the recent rally in banking stocks, helping the Nifty Bank index regain lost ground faster than other sectors. With returns of 41 per cent in three months, the Nifty Bank compares superior to defensives, such as the Nifty IT and Nifty FMCG indices, and the Nifty (up 22 per cent).

That said, it is still eight per cent short of its year-to-date and year-on-year levels; analysts say with fresh business trends being a mixed bag, investors may hit the pause button, even as the Nifty Bank is only a few points away from reclaiming its psychological mark of 30,000 points.

What funnelled money into the banking stocks were fundamental assumptions that the recovery on the ground was faster than anticipated and that the instances of loan recast may not be material. While both are true to some extent, a recent report by Nomura highlighted the trend in recovery isn’t secular. Also, in the second week of December, the Nomura India Business Resumption Index at 90.8 per cent saw a steep sequential fall from 92.4 per cent a week ago.

“The stumble in the index is relevant given that the festive season is coming to a close, and some ebbing of the pent-up demand is widely expected,” the report stated. Adding to Nomura’s views, those at Kotak Institutional Equities said the commentary on collection efficiency and moratorium does not give much insight, and hence, makes it harder to differentiate and establish credit costs. “We have had to rely extensively on small sample size channel checks or discussions with the management and had challenges forecasting asset quality or earnings in the past,” they noted.

What’s more, with the deadline to restructuring fast approaching, bankers are saying their estimates on loan recast applications, particularly for retail loans, may have been on the lower side. “We are getting more than expected requests,” said a senior banker. Axis Bank indicated last week that non-performing assets of retail loans may increase in the second half of FY21.

Clearly, headwinds outweigh positives, and with mu­ch of the good news between October and November alrea­dy priced in, Abhishek Muraka of IIFL Capital says the Dece­mber quarter’s asset quality trend will be closely watched. “Any further rerating will depend on this data,” he adds.

For investors, booking profit in banking stocks, particularly in the mid-cap space, may be prudent.