Banking stocks drag markets to one-month low

Sensex slips below 31,000; banking index falls 1.5%

The Indian markets on Tuesday ended at their lowest level in a month after banking stocks fell on worries of higher provisioning. Falling for a fifth straight day, the Nifty 50 index closed at 9,511.4, down 63.55 points, or 0.66 per cent, the most since May 18. The 30-share Sensex closed at 30,958.25, down 180 points, or 0.6 per cent. Both the indices closed at their lowest level since May 25. Analysts say the markets have turned volatile ahead of the expiry of the June series derivatives contracts on Thursday.

The BSE Bankex, a gauge for the performance of banking stocks, fell 1.5 per cent, the worst among sectoral indices. Shares of State Bank of India fell 3.3 per cent, Axis Bank dropped 2.3 per cent and ICICI Bank fell 1.2 per cent. 

Rating agency CRISIL said banks will have to increase provisioning on the top 50 non-performing assets (NPAs) by another 25 per cent in the year to March 31, 2018. Analysts said the higher provisioning will weigh on profitability and erode capital for many banks, forcing them to report losses in the coming quarters.

Weakness in the banking stocks could weigh on the market, as the sector accounts for nearly a third of weightage on the Sensex and Nifty indices. 

Besides banking sector woes, investors have also turned cautious ahead of the implementation of the goods and services tax (GST), which some fear could create near-term disruptions.

“While investors are optimistic about a unified tax code for the country, they are cautious about the near-term impact of its implementation,” said Karthikraj Lakshmanan, senior fund manager-equities, BNP Paribas Mutual Fund. “Long liquidation pressure was strong due to concerns over GST preparedness and approaching derivative expiry. Banks which had so far been riding the wave of NPA resolution hopes, were among the heaviest sectoral losers,” said Anand James, chief market strategist, Geojit Financial Services

Despite straight five days of losses, the Sensex is just 1.14 per cent down from its peak of 31,311.6 recorded on June 19. The Nifty has come off 1.72 per cent from its high of 9,675, touched on June 5.

Following a sharp 16 per cent rally this year, the Sensex now trades at one-year forward valuations 19 times, above its long-term trading average of around 16 times. Many see expensive valuations without lack of encouraging growth in earnings a key risk.

Meanwhile, foreign portfolio investors (FPIs) have pulled out $325 million (about Rs 1,500 crore) from domestic stocks in June. On a year to date basis, however, their investment tally stands at $8.3 billion. On Tuesday, FPIs bought shares worth Rs 292 crore, while their domestic counterparts pulled out Rs 149 crore.

“While scepticism reigns on the prognosis of the equity bull market, there’s no doubt about the level of fear…We would postulate that this fear is driven by two key factors: The embedded painful experience of sell-offs we have experienced each of the past two years, and heightened valuations,” Sanctum Wealth Management said in a report.