Financial sector's weight in Nifty back to pre-note ban levels

The Bank Nifty index has gained 13.4% this year against a 9.3% gain in the Nifty 50

Banking and financial stocks are back in the reckoning with the weight of these stocks seeing a surge in the Nifty 50 index in the past two months.

Demonetisation had taken the zing out of India’s banks and financial services sector, with a 50-basis point (bp) quarterly decline in the sector weight in the benchmark NSE Nifty 50 index at the end of December due to investors’ concerns about the adverse impact of demonetisation on the financial sector’s earnings.

However, with the resurgence of banking stocks in the past two months, the sector’s weight has inched up 100 bps to 30.7 per cent at the end of February this year, up 100 bps from 29.7 per cent at the end of December. The index weight stood at 30.2 per cent and 28.8 per cent in the September and June quarters, respectively.

“The December results (of banks) were not as bad as it was in June and it looks like the worst is over for the banking sector,” said G Chokkalingam, founder, Equinomics Research and Advisory. A low interest rate environment, tapering of net non-performing assets (NPAs) and pick-up in credit demand augur well for the sector, according to Chokkalingam.

The Bank Nifty index, which comprises 12 banks, has gained 13.4 per cent this year against a 9.3 per cent gain in the Nifty 50.

Analysts believe slow economic growth remains the main challenge to the banking sector.  “We are turning a bit more cautious with stocks moving higher in the face of weaker fundamentals. Falling growth, compressing spreads and asset quality risks (especially in the power sector) implies the sector is closer to a peak,” said foreign brokerage Jefferies, in a recent note.

There are nine financial stocks in the Nifty 50 benchmark index, which include eight commercial banks and Housing Development and Finance Corporation (HDFC), the country’s largest non-bank lender.
 

The index weight has been calculated by BS Research Bureau and excludes the value of promoter holding in companies.

The information technology (IT) services sector has been the biggest loser in the Nifty 50 index. The sector’s weight in the index had reduced to 12.8 per cent, from 13.7 per cent at the close of the December 2016 quarter. The sector weight has declined 270 bps from 15.5 per cent at the end of June 2016 quarter.