Juxtaposing India’s Covid infection graph and Nifty Bank chart shows the connection. As financial stocks are more sensitive to the macroeconomic situation, Nifty Bank has been mirroring the impact of the Covid crisis over the past 12 months.
On September 24 last year, Nifty Bank hit a low of 20,405 days after India recorded the peak of 1,017,754 daily Covid cases in the first wave on September 18.
As Covid infection rates started to drop after that, Bank Nifty started recovering and rose to a new high of 37,709 on February 16. That’s when the daily number of Covid cases had fallen below the 10,000 mark. Nifty Bank outperformed Nifty by around 40 per cent during that period.
As the second wave of Covid surfaced in February-March, the bank index once again displayed a negative correlation. With the peaking out of Covid cases last month, Nifty Bank delivered 9 per cent return on a monthly basis, outperforming Nifty by 1 percentage point.
“As the economy normalises and growth comes back, financials are well positioned to play the reflation trade,” said CLSA analyst Vikash Kumar Jain.
He said the valuation of Nifty Bank, on a relative basis to that of Nifty, is trading at a high discount. “FII positioning on the bank counter is at its lowest in more than six years. DIIs are far from the heydays of 2019. So the positioning is light. It is a pretty good reflation trade,” he told ETNow.
In a recent report, CLSA had said Indian banks are coming out of a multi-year credit cycle, which should lower credit costs drastically. “Our banking team believes top largecap banks have surplus provisions to offset balance sheet risks from the second wave,” it said.
CLSA’s current equal-weighted India focus list includes
, SBI and among 13 stocks.
Several other brokerages have also turned bullish on bank stocks, despite worries over additional stress on their loan books due to Covid 2.0.
IIFL Securities said the banking sector is poised for growth, as the credit cycle begins to turn. It advised investors to use short-term uncertainty to accumulate quality stocks. The brokerage is positive on ICICI Bank,
, Axis Bank, and SBI.
Last Friday, BofA Securities Europe bought 3.6 million shares of IndusInd Bank through a block deal. “The sector is ripe for consolidation. The big ones will become bigger. The ones with poorer balance sheets tend to give away market shares to better-run players,” said Pramod Gubbi, founder, Marcellus Investment Managers.
A Balasubramanian, Managing Director and CEO of Aditya Birla Sun Life AMC, said balance sheets of most of the big banks have become stronger and the NPA levels are not as high as they were feared to be.
