Bank Nifty posts biggest gain in 5 months, offsets Reliance losses

Catch-up rally in banking stocks on better-than-expected Q2; analysts expect the momentum to sustain

It isn’t a normal feat for the markets to end in the green on a day when Reliance Industries (RIL) — an index heavyweight — tumbles nearly 9 per cent. Despite a 524-point negative contribution by the stock, the benchmark Sensex managed to end with 143-points gain. It was the banking pack that helped the markets manage to offset the losses made by RIL. 

The widely-tracked Bank Nifty index, a barometer for banking stocks’ performance, gained 4.2 per cent — its biggest single-day gain since May 27. ICICI Bank (up 6.3 per cent), Axis Bank (6.1 per cent), SBI (3.6 per cent), and HDFC Bank (2.7 per cent) led the gains. So what propelled banking stocks on Monday?

Stronger-than-anticipated July-September quarter (Q2) performances of four leading banks — Bank of Baroda, Axis Bank, IndusInd Bank, and ICICI Bank — fired up the stocks in the sector. Lenders who are yet to post their results also rallied due to the optimism.

Asutosh Misra, head of research-institutional equity, Ashika Stock Broking, said with Q2 being better-than-expected on the growth and profitability fronts, some of the short positions that were being built into banking stocks over the months unwound on Monday. Banking stocks have been a laggard since March, with huge negative positions being built up since then. While every major sectoral index reached its pre-Covid level, the Nifty Bank index was left behind. Despite Monday’s gains, which brought the index to the 24,829 level, the Nifty Bank has a long way to go to recoup its December 30, 2019, closing at a high of 32,354 points. According to Misra, the positive stance on banking stocks should help recoup some lost ground, though there aren’t many triggers hereon for a massive rally like Monday’s. “Hereon, the index may mirror global cues and move in tandem until December, until a clearer picture on loan recast emerges,” he explained.

If the proportion of recast is lower than estimates, experts believe banking stocks may be in for a huge rally from January. “I am surprised by the bullishness exhibited by banks. It is indeed a V-shaped recovery, going by their numbers,” said Suresh Ganapathy of Macquarie Capital. He felt that if the current trend continued and going by his conservative provisioning estimates for FY22, there could be a 30-40 per cent earnings upside. “Normalised credit costs for FY22E could be below 150 basis points (bps), against the current estimate of 200 bps now factored in,” he pointed out.

Though brokerages are revising their earnings estimates upwards for FY22, according to Misra, the Street may take a pause after the December quarter results to review the asset quality of banks. “Now banks have taken upfront provisioning at the cost of profit and loss statement. In December, the balance sheet will reflect a better picture on non-performing assets,” he added.

On the year-to-date basis, the Bank Nifty index is still down 23 per cent. In comparison, the Nifty is down just 4 per cent.