Why has Bank Nifty underperformed Nifty?

Story of the last one month

If you look at the stock markets in the last one month, the most obvious inference is that the Nifty has faced resistance at the 20,000 levels. Over the last 3 weeks, the Nifty has gradually drifted lower to the 19,265 levels. However, the much bigger story of the last one month is the sharp fall in the banking stocks. This includes heavyweights like ICICI Bank and Kotak Bank, which have lost substantial value. But to get a macro picture, let us look at the Nifty compared with the Bank Nifty over the last one month.

Data Source: NSE

As is evident from the table, the Nifty has fallen -2.59% in the last 1 month, while the Bank Nifty is down -3.97%. Clearly, the fall in the Bank Nifty has been much sharper than the fall in the benchmark Nifty. Why exactly has the Bank Nifty fallen so sharply. One can enumerate several reasons for this dichotomy, and it assumes importance since the financials have a weightage of more than 37% in the Nifty overall.

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Global hawkishness has been a major factor

As the inflation in most of the economies fell in response to rising interest rates, the central banks did not give up on their hawkish stance. The central banks like the ECB and the Bank of England have continued to remain very hawkish. Even the US Fed has maintained a hawkish stance, arguing that they would not hesitate to raise rates further if the inflation did not come under control. But, why would this impact Indian banks.

If one looks at the interest rate management in the US and India in the last 6 months, India has veered towards status quo, although the US has not hesitated to raise rates, despite the inflation falling to a level of just 100 bps away from the 2% target. This creates a situation when the bond yields in the US keep inching up. In response the Indian yields also inch up, as is evident in the last few days. However, the repo rates are not increased as the RBI is worried about the impact it has on cost of funds for Indian corporates. Indian trade bodies have been lobbying with the RBI against any rate hike move for now.

That means two things for the Indian banks. Firstly, the repo rates are not going up, so there is not much of gains they make in terms of repricing of loans. At the same time, the higher yield would put pressure on the bond values in the bank portfolios as they would fall in tandem with the rise in bond yields. This is a key factor that has been hurting banks.

Fitch downgrading us debt has been a reason

The world of finance often behaves in a rather paradoxical manner. In early August 2023, one of the Big-3 rating agencies, Fitch Ratings, downgraded US sovereign debt ratings by a notch to “AA+”. This is the first since the year 2011 that US debt ratings were being cut. The move led to a virtually furore as big names like Paul Krugman and Mohamed El Erian called the move highly misplaced. It was not just about Janet Yellen and Larry Summers criticizing the move, but even economists felt the move was badly timed, especially when the US had managed to beat the inflation monster without hurting growth too much. 

However, that is off the point. The real point is the paradox mentioned here. While the US bond ratings were downgraded citing fiscal deficit and governance challenges, global markets saw huge risk-off flows. Money flowed out of emerging markets like India and other into safe havens in developed markets. Ironically,  much of these flows went back into US bonds, almost justifying the criticism of Krugman and Erian. Now when money moves out, the selling is prominent in sectors where the weightage is the most and that is where the banks took it on their chin.

Moody’s cutting US bank ratings did not help

It was a rating challenge of a different kind for India. Since the start of the year, several mid-sized US banks like Silicon Valley Bank, Signature Bank and First Republican Bank went bust amidst a cash crunch. The US Fed moved in quickly to rectify the situation but Moody’s has now opined that the worst of the US banking crisis was yet to come. According to Moody’s many of these small and mid-sized banks operated very vulnerable business models and had benefited in recent years due to less stringent regulations on smaller sized banks. That model continues in the US and Moody’s has highlighted that as a major risk factor. This bank downgrade had an immediate spill-off effect on most Indian banks too. Obviously, for most of the FPIs, the immediate selling target in the aftermath of the Moody’s downgrade of mid-sized banks was to sell Indian banks, especially private banks which were fully valued.

Banking results engine may be losing steam

In the last 3 quarters, the banks have been the star performers. The sharp 250 bps rise in the repo rates between May 2022 and February 2023 had resulted in bank loan yields going up but deposit rates not moving up in tandem. This resulted in record levels of growth in net interest income (NII) and a consistent expansion in the net interest margins (NIMs) to the highest levels seen in the last decade. However, analysts have been cautioning investors in the last few months that this kind of euphoria was not exactly sustainable. That has also resulted in domestic investors also gradually paring their stake in banking stocks.

The sharp fall in the banking stocks comes from all-time high levels of the Bank Nifty Index. Hence, on a yoy basis, the banks are still up 14%, even after the recent fall in the banking index. For now, the pressure on the Bank Nifty looks all set to continue. Market insights with TradingView can help in effortless investing. A trading platform offering Real-time economic calendar data with other cutting edge analytical tools.