Time to bank on banks?

As markets around the world continued to calibrate the currents of inflation, monetary policies, and Omicron, the beacon of pessimism was passed on to domestic bourses as well. FIIs have been withdrawing funds on a daily basis this month. In fact, FIIs have been net sellers since April 2021, with the exception of September2021.

Bank Nifty has been a major victim of this selling spree, with most of the top ten constituents of the index experiencing a sequential drop in FII holdings for the quarter ended September 2021. In fact, Bank Nifty has been a relative underperformer not only since the outbreak of the pandemic, but also on a YTD and 6-month basis.

This is not unusual as historically, a link between the sell-off by FIIs and the underperformance of the Bank Nifty has been observed. If we look at the twelve months with the highest FII outflows since 2017, Bank Nifty has underperformed the benchmark index two-thirds of the time.

However, the sector’s current fundamental positioning indicates a positive long-term outlook. In the quarter gone by, most of the bigger banks either met or outperformed market expectations. Banks not only improved their asset quality on the back of improved collections and limited restructurings, but they also managed to equip their balance sheets with adequate provisioning to avoid shocks.

On the lending front, resilient loan growth was seen in the last quarter and this is expected to accelerate even further given an increased traction in housing demand, recovery in certain sectors like automobiles and an overall favorable economic environment.

While bottomed out interest rates have augured well, even a rise in policy rates can expand NIM and therefore lead to higher earnings. What’s interesting is that the sector is still trading at a decent valuation, with more than half of Bank Nifty constituents trading below their 3-year average P/B multiple.

This, combined with multiple tailwinds, leaves ample headroom and value for banking stocks to exploit. As a result, investors can pile up stocks of fundamentally sound banks in order to capitalize on this long-term opportunity.

Event of the week

In an effort to ramp up its efforts against an almost four decadal high inflation, the Fed signaled that its reign of easy policy is coming to an end. The planned $30 billion per month acceleration of tapering will bring the pandemic-driven bond purchases to a close in March 2022, setting the road for hike in the fed funds rate.

Officials at the Fed anticipate three rate hikes in 2022, two the following year, and two more in 2024. The well telegraphed interest rate hike trajectory, along with less hawkish policy than anticipated, gave much-needed comfort and helped US markets rally. Back home, although our central bank provided no future guidance, Nifty also snapped its four-day losing streak and closed in the green temporarily following the Fed’s announcement.

Technical Outlook

Bank Nifty index closed the week on a negative note, facing resistance around 37,300 levels post a brief bounce. While there is no evidence of bullish momentum, Bank Nifty is trading at a crucial support which coincides with its rising trend line.

The previous resistance of 35,600 is now acting as a strong demand zone, thereby offering a good risk-reward opportunity on the long side. Even the benchmark index Nifty is consolidating around crucial price levels.

Support and resistance for Bank Nifty are now placed at 35,500 and 37,500 respectively while those for Nifty are placed at 16,900 and 17,600 respectively. Traders can maintain a neutral outlook and trade with tight stop losses below immediate supports for long positions.

(The writer is the head of the Samco Securities, views are personal)