Nifty Bank: 9 years of outperformance wiped in 4 months due to pandemic

The index has fallen 32% since January, against an 8.2% decline in Nifty50

For nearly a decade, banks, especially private sector lenders, were the perfect stocks for investors and fund managers to pick to beat benchmark indices and generate alpha returns in their portfolios. The Covid-19 pandemic has ended this as years of outperformance by banking stocks has been wiped off over the past four months.

The Nifty Bank Index has fallen 32 per cent since January, and continues to lag behind the broader market. Over the same period, NSE Nifty is down just 8.2 per cent. Banking stocks have also lagged in the market recovery since the March 24 lows. The banking index has risen 36 per cent from its 52-week low touched on March 24, as against a 50 per cent jump in the benchmark Nifty50 index during the period. 

Compare this with the Nifty Bank index’s performance over the years. It nearly tripled between 2011 and the end of 2019, compared with the benchmark index, which doubled.

Analysts attribute this fall to investors’ fears about a rise in non-performing assets (NPAs) because of Covid-19 and the lockdown. “The six-month moratorium on loan servicing granted by the Reserve Bank of India (RBI) has created doubt in investors’ minds about banks’ asset quality. This is weighing down banking stocks,” says Shailendra Kumar, head of research at Narnolia Securities.

Analysts say uncertainty about bad loans will persist until 2020-end. “Banks will start reporting the true state of their NPAs from the third quarter and clarity will emerge by the end of March 2021,” says Dhananjay Sinha, head of research of institutional equity at Systematix Group.

In the financial stability report, RBI said it sees around 50 per cent rise in NPAs on incremental basis because of the decline in economic activity. The central bank expects gross NPAs to grow to 12.5 per cent of banks assets from around 8.5 per cent at the end of financial year 2019-20 (FY20).

 

 

Market analysts say the NPA scare is overdone and the underperformance of banks offers a buying opportunity. “The June quarter (Q1) results suggest that incremental rise in bad loans could be much lower than what market expected initially and quite a few retail lenders may actually come out of it stronger and bigger,” adds Kumar.

The confidence stems from the double-digit growth in deposits reported by most private banks during Q1 and low level of moratorium.

Others say that the banking system as a whole has enough capital to absorb losses from incremental NPAs. “The incremental bad loans from the pandemic and the lockdown are expected to be around Rs 3 trillion, which is equivalent to banks’ combined profits before provisions last year. Besides, banks are sitting on accumulated reserves and profits. So, I don’t expect much impact on growth plans for FY22 and beyond,” says Sinha.

Analysts are advising investors to get stock specific in the sector and use low stock prices and valuations to pick quality bank stocks. In the past, large private sector banks focussed on retail lending outperformed the industry and the market.

Meanwhile, some other analysts advise investors to go underweight on banks. “Banks may survive the pandemic, but the stock market may punish them for using capital to write-off bad loans, rather than growing their loan book or paying higher dividend,” says G Chokkalingam, founder and MD of Equinomics Research & Advisory Services.