What should you do with bank stocks?

After gaining 26% last month, Bank Nifty has lost 9% in the last two days

Is the recent volatility in banking stocks unnerving you? The month of September so far has been fairly good to the markets, but it has been playing havoc with financial stocks, especially banks.

Bank Nifty was among the best performing indices the past month and increased 26%. But a bout of heavy selling post the credit policy announcements saw banking stocks being pummeled and the Bank Nifty lost 9%.

Experts say that banking stocks are among the most sensitive in this market because the risk perception of investing in them has increased lately. Banking stocks have been hit by the rising interest rates, higher costs of short-term liquidity that is affecting their ability to lend, and slower deposit growth of 13%. Although credit growth has been strong at 18%, the challenges on net interest margins and NPAs remain a huge concern for the markets.

Says Hatim Broachwala, senior research analyst, Karvy Stock Broking: “The kind of volatility it has is huge and it happens with every sector like infra where the risk perception has increased.”

Private sector banks are facing the headwinds of rising interest rates and the repo rate hike may impact their loan growth. For the public sector banks, the markets are unnerved due to the rising non-performing assets that have increased more than 25% year-on-year.

So what should you do with banking stocks? Experts feel that while there’s value in banking stocks as some of the PSU banks are trading at compelling valuations, it’s becoming increasingly difficult to pick the right bank stocks.

Says Broachwala: “Short-term it would be a challenge to pick bank stocks as the future prospects are not clearly visible for investors.”

But experts also feel that if you are a long-term investor, you could find pockets of value as some stocks are available at attractive dividend yields of around 7-8%.  Experts feel that it’s best to avoid dabbling in banking stocks for the short-term, while investors could buy at lower levels for the long-term in some select stocks.