Investor sentiment on bank stocks takes a negative turn

BSE Bankex closes below 200-day moving average; inflation data and earnings in focus

Banking stocks on Monday continued to witness selling pressure, as investors turned cautious after a sharp run-up in the recent months on concerns of inflation and earnings.

The BSE Bankex, an index tracking performance of key banking shares, ended 1.13 per cent at 12,631.37, below the 200-day moving average (DMA) of 12,740. A stock or an index trading below its 200-DMA is considered to be in a long-term downward trend. The Bankex was also the worst-performing sectoral index among all BSE sector indices.

Analysts said investors could expect a negative move from the Reserve Bank of India (RBI) if inflation doesn't come under control.

“Markets are factoring in a negative surprise from the central bank. Banking stocks will remain volatile ahead of inflation data,” said an institutional sales head with a domestic brokerage. “Fundamentally, things are largely the same. The Street doesn't have high expectations from the December quarter earnings, while the asset quality isn't expected to be as bad as in the previous quarter.”

Wholesale price inflation data will come next week, which will set the tone for RBI to act on key policy rates. In its previous policy meeting in December 2013, RBI had kept the interest rates unchanged. It, however, had warned there may be a rise if inflation doesn’t subside.

Shares of leading banks such as ICICI Bank and State Bank of India fell two per cent each on Monday, adding to the banks’ previous week's fall. The benchmark Sensex and Nifty indices, where financial stocks have over a fourth weightage, also ended lower for a fourth straight trading session.

Derivatives analysts said the high-beta banking sector has seen a built up of short positions, which could see the stocks underperforming in the coming days.

“The Bank Nifty index has seen formation of short positions even as Nifty has seen some unwinding of short positions. High weightage of banking stocks will act as a drag on the market,” said Siddharth Bhamre, head of derivatives at Angel Broking.

The banking sector index had rallied more than 50 per cent in the last four months of 2013, almost double the gains in benchmark indices. While it has fallen about eight per cent against just a three per cent fall in the market since mid-December 2013.

Analysts expect banking stocks to post moderate growth in earnings in the December quarter as they see stabilisation in asset quality and net interest margins.