Banking stocks see strong gains, Nifty Bank rallies 11{bce2ac57dae147ae13b811f47f24d80c66c6ab504b39dda4a9b6e8ac93725942} in three days

have seen strong gains this week with the index surging nearly 11 per cent in the last three trading sessions (starting May 23). In comparison, the Nifty50 is up 5 per cent.

The gains come after huge selling pressure and consequent under-performance of since the start of March. The financial sector, banks and non-banking finance companies (NBFCs), are seen to be most impacted due to the Which is why, the lost 41 per cent between February 28 and May 22, compared to a 19 per cent decline in Nifty50 (see table). Some individual bank stocks had seen bigger losses, ranging 45 – 52 per cent; IndusInd Bank was down nearly 70 per cent, during this period.

“There were some institutions, which were selling financial stocks over the last month and a half. Their selling reportedly got over about a week back. And, at these prices, some other institutions felt that the fall is much more than warranted, and hence we have seen them buying and the recent upmove,” said Deepak Jasani, Head Retail Research at HDFC Securities.

A lot of short selling also took place when delivery sales was happening. And, once the delivery based selling stopped, these shorts also came in to cover their positions, thus pushing up prices, Jasani added.

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G Chokkalingam, Founder, Equinomics Research & Advisory shares similar views. “The rally in is not due to change in outlook for the sector, but mainly for short-covering given the monthly derivatives expiry (which happens on last Thursday of the month),” he said.

Banking stocks are not alone in getting support due to monthly expiry of derivatives contracts. Their huge weighting in leading indices and high beta makes them popular.

Most experts, however, do not expect the rally in banking stocks to sustain for long. Outlook for the sector is still worrisome and this rally indicates that the divergence between stock performance and earnings, adds Chokkalingam.

Even though lower interest rates and the (RBI) last Friday extending moratorium by 3 months offer support, the Street is concerned above asset quality of banks and And, this may weigh on stock prices.

“We think the fundamental issues will keep cropping up. Only when the is fully lifted, will we be able to gauge the full impact on asset quality and banking stocks,” said Jasani, adding that while some stocks could see an uptick due to momentum with more people wanting to participate, “at higher levels we expect the selling to resume”.

In fact, extension of moratorium is only postponing the asset quality check (amidst Covid-19) for banks and thus making investors jittery. That is why soon after the RBI’s announcement, the shed about 3 per cent on Friday.

The worries are not limited to the Covid-19 period. “Asset quality pain would in turn lead to a dearth of growth capital for banks after things normalise. And given the situation where valuations are so down, raising funds could be an issue for banks, mainly state-owned,” says an expert from a foreign broking house. Recently, some foreign brokerages and rating agencies estimated capital requirement by banks at $20-50 billion, due to expectations of higher delinquencies.

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pertaining to fund raising by a few private banks (Kotak Mahindra Bank, and IDFC First Bank) has also given some comfort to investors and is partly reason for the rally. In fact, this week’s strong gains in Nifty Bank are driven by private banks (Axis Bank, IndusInd Bank, HDFC Bank, ICICI Bank and Bandhan Bank).

Sanjiv Bhasin, director at IIFL, however, is positive on the sector. “The economy is opening slowly as airlines and railways have been re-started. We are not bearish on banks and believe, consumption would come-back sharply as things normalise, and factors such as good Rabi output and monsoon should support the overall consumption and benefit banks,” he said.

The jury is out.