Investors pick up banking stocks

Most stocks rally 2-5%; Kotak Mahindra Bank and Axis Bank major gainers

On Tuesday, investors bought banking stocks, most of which rallied two to five per cent on the National Stock Exchange (NSE). At 10,575, the Bank Nifty gained 2.4 per cent, or 249 points, compared with the CNX Nifty’s 0.9 per cent rise (6,127 points). These stocks fared poorly through the past month.

Among banking stocks, Kotak Mahindra Bank and Axis Bank were among the top gainers on Tuesday, rising about five per cent each at Rs 680 and Rs 1,165, respectively. ICICI Bank, UCO Bank, Indian Overseas Bank, Lakshmi Vilas Bank, Allahabad Bank, Punjab National Bank (PNB), State Bank of India (SBI), Canara Bank, Union Bank of India and IndusInd Bank also recorded gains.

“It seems the market is into a strong pull-back, which might lift the Nifty beyond 6,200 and the Bank Nifty beyond 10,700-levels. Any correction from current levels to major supports such as 6,110 and 6,085 will be an opportunity to buy with a short-term view. The Bank Nifty has support at 10,490 and 10,410. Buy between these levels with a target of 10,600 and 10,700,” said Shrikant Chouhan, head (technical research), Kotak Securities said.

Underperformance
In past month, the Bank Nifty has underperformed the market, falling 5.4 per cent compared to a three per cent decline in the benchmark index. Stocks of public sector banks such as Bank of India, United Bank of India, Allahabad Bank, Canara Bank, UCO Bank, Bank of Baroda and Syndicate Bank had plunged 15-30 per cent, after reporting disappointing earnings for the quarter ended December, owing to rising bad loans. Stocks of YES Bank, Dena Bank, SBI, Kotak Mahindra Bank, PNB and Corporation Bank fell nine-15 per cent during this period.

Recapitalisation commitment
Reiterating the government’s commitment to capital infusion in public sector banks, Finance Minister P Chidambaram, in his 2014-15 interim Budget speech on Monday, budgeted for Rs 11,200 crore of capital infusion in these banks. “The amount of capital infusion is much lower than the FY14 revised estimate of Rs 16,100 crore. In our view, the capitalisation is unlikely to be adequate, given the weak capital levels, the subdued profitability matrix across public sector banks and the stringent Basel-III tier-I capital adequacy ratio requirements. Raising capital from markets is likely to be challenging, considering the low market appetite for public sector banks’ equity. Also, this might result in further overhang on the stocks of these banks,” say analysts at Angel Broking

Stock picks
In its model portfolio, Kotak Securities cut its weight in SBI, while increasing it in HDFC Bank and HDFC. “We recognise the issues with the loan books of Axis Bank and ICICI Bank (exposure to companies with stressed balance sheets), but derive some comfort from the high capital ratios of the banks and the high loan-loss provisions assumed by us over FY14-16,” says Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities.

Prabhudas Lilladher has upgraded YES Bank to ‘buy’ from ‘accumulate’, with a price target of Rs 400 a share.

Mukul Kochhar, Aditya Jhawar and Nitesh Sharma of Espirito Santo Securities believe the Indian economy, aided by a rebound in the current account deficit, is in stable territory no. But they say a real boost will only be seen when investment sees a sustained pick-up, adding in all probability, this will take at least a couple of years.

“However, this period of stability may provide room for balance-sheet repair, and we are not averse to selectively picking financial beta in the interim such as Axis Bank and Federal Bank, in which the upside seems to be fairly reasonable and corporate asset quality has stabilised, while retaining core portfolio picks HDFC Bank and HDFC,” they say.