Attractive valuations, short covering: Why Nifty Bank gained 10% in 2 days

On the technical charts, Bank Nifty made a 'Double Bottom' pattern at around 17,000 levels on May 22, which indicated that a rally was bound to happen, says Nandish Shah of HDFC Securities

The most beaten down stocks at the exchanges in the month of May, banks and non-banking finance companies (NBFCs), have taken the Street by surprise over the last two days. Between April 30 and May 26, Nifty Bank and Nifty Private Bank indices skid 19 per cent each, compared to a 8.4 per cent decline in the benchmark Nifty50 index.

However, Nifty Bank index surged a massive 1,270 points or 7.28 per cent to settle at 18,710.55 on Wednesday, and extended its rally on Thursday to advance 4 per cent in the intra-day deals. The index, however, pared some gains and settled 2.45 per cent higher, taking the cumulative gains to 10 per cent for the two days on closing basis. Nifty Private Bank index, too, surged 12 per cent in the last two trading sessions, ACE Equity data show.

However, for analysts tracking the sector, the rally just ahead of the monthly expiry of the May series of Futures and Options (F&O) contracts, was in the offing for some time.

“Bank stocks had collapsed drastically at the bourses. Expecting them to remain weak, people built massive short positions in the banking counters during the previous fortnight. These positions are now being covered ahead of the expiry today,” says Nandish Shah, technical and derivative analyst at HDFC Securities.

He explains that Nifty Bank Futures added massive 30 per cent in open interest (OI) on May 22, which led to a contraction in the discount (in value) from 90 points to 63 points which indicates that certain investors created long positions at lower levels. “Sensing this, traders went short. On the technical charts, Bank Nifty has made a ‘Double Bottom’ pattern at around 17,000 levels on May 22, which indicated that a rally was bound to happen... Once the index crossed 17,600, which was the major resistance level, the index moved higher sharply on short covering” he says.

Moreover, 17,000 put options – the option to sell a stock in future – were written in Bank Nifty on Tuesday, May 26, while over 18,000 call options – the option to buy a stock in future – were written on Wednesday, May 27, indicating the uptrend momentum could continue in the days to come, says another analyst with a domestic brokerage.

Negatives priced in

Apart from the technical reasons, analysts believe the negatives for the banks are already priced in as things stand, and the stock prices have become attractive.

“Due to below par earnings for Q4FY20, extended moratorium and overall weak sentiment in the market, bank stocks underperformed the benchmarks in the recent past. However, most of these negatives are now priced-in, which is fueling the pent up demand for quality stocks,” says Gaurang Shah, head- investment strategist at Geojit Financial Services.  

Rally to continue

Looking at the current pattern, analysts believe that bank stocks could continue to outperform for at least two weeks.

“Despite the sharp rise in Nifty Bank and Nifty Private Bank indices yesterday, Bank Nifty shed only 3 per cent from OI. This indicates that there are still many investors who are holding short position in the market. This would mean that Nifty Bank index can outperform from here on,” says Shah of HDFC Securities.

For the May series, Shah says that OI in Bank Nifty has risen 79 per cent compared with previous series. Given this, he believes the June series may begin at 4-5 month (series) high.

As of Wednesday, roll over in the Nifty Bank was at 51.46 per cent compared to 64.35 per cent in April series.  Moreover, the Bank Nifty May roll over is lower than its three-month average of 53.02 per cent and its six-month average of 49.8 per cent, data compiled by Nirmal Bang Institutional Equities show.

Fundamentally, even though the sector may remain under pressure for the next six months, tides may turn from Q3FY21, analysts say.

“The weakness in earnings that we have seen in Q4FY20 reflected negligible impact due to Covid-19 led lockdown. Banks have created huge provisions to cushion against any likely bad loan problem, but that doesn’t necessarily mean that all the loans under moratorium would turn bad,” says Gaurang Shah.

Going forward, Nitin Aggarwal, vice president of research for the banking sector at Motilal Oswal Institutional Equities, believes that private banks would emerge much stronger in FY22 and investors should stick to stocks of quality large-cap banks.

“Private Banks are better placed, in terms of capital adequacy and credit costs, to emerge stronger from this crisis as the moratorium and extra provision would not affect their non-performing asset (NPA) levels in a big way,” he says.

Company Name	Price (in Rs) as on April 30	Price (in Rs) as on May 26	% Change
Nifty50	9859.9	9029.05	-8.43
IDFC First Bank Ltd.	21.9	19.85	-9.36
HDFC Bank Ltd.	1001.8	852.4	-14.91
Kotak Mahindra Bank Ltd.	1357.2	1153.2	-15.03
RBL Bank Ltd.	132.15	110.55	-16.35
Punjab National Bank	32.3	26.7	-17.34
Nifty Private Bank	11743.45	9511.2	-19.01
Nifty Bank	21534.5	17440.35	-19.01
State Bank Of India	190.5	151.4	-20.52
The Federal Bank Ltd.	48.8	38.45	-21.21
Bandhan Bank Ltd.	262.35	202.15	-22.95
ICICI Bank Ltd.	380.15	292.7	-23.00
Axis Bank Ltd.	444.9	341.3	-23.29
Bank Of Baroda	49.2	37.1	-24.59
IndusInd Bank Ltd.	468.15	348.2	-25.62

Source: ACE Equity