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Why Nifty Bank has underperformed Nifty50 in the past one year

  • Tuesday, 30 April 2024
Why Nifty Bank has underperformed Nifty50 in the past one year

Authored by Shrey Jain, Founder and CEO of SAS Online

Rallies in the markets may not present a clear picture of certain key developments. This is the very nature of the markets. A little bit of digging helps reveal stories which may not be apparent in the broad sentiment which engulfs the markets. Take for instance, the banking index. In the past one year ended April 22, 2024, the Nifty Bank index has given only 12.41% returns compared to 25.89% returns by the Nifty 50 index. Beneath this underperformance lies a story. Let us explore it in detail:

Investors preferred public sector banks (BPSUs) to private sector banks. BPSUs largely finance institutional and corporate borrowers and private sector banks are known for catering retail credit needs. Despite strong credit offtake, stocks of private sector banks did not do well. There is a reason. Private sector banks were richly valued compared to BPSUs. In a high interest rate regime, value conscious investors preferred to stick to BPSU. The PSU rally also improved the sentiment around PSU bank stocks. However, these stocks have a relatively low weight (around 15%) in the Nifty Bank index. Hence the positive impact on Nifty Bank Index was not as much.

The largest stock in the Nifty Bank Index – HDFC Bank--with 29% weight remained under pressure through the year due to a variety of reasons. Investors have concerns about the challenges related to compliance and funding post the merger of HDFC Bank with its parent: Housing Development Finance Limited (HDFC). In the past one year, HDFC Bank's shares have lost 10.3%. Another important reason for weak performance of banks' stocks is the regulatory actions by the Reserve Bank of India. RBI slapped fines to many lenders due to slippages in the areas of know-your-client, risk categorisation, and provisioning among others. Though, fines looked small in the context of the quantum of profits of banks. RBI also made a few banks stop onboarding new clients and selling new credit cards. These actions impacted stock prices of banks. Investors also factored in lower earnings from other banks offering similar products, anticipating similar regulatory actions. These facts turned investors cautious.

In contrast to this, stocks from auto, power and energy sectors did well and lifted the returns offered by the Nifty 50 index. Among constituents of the Nifty 50 Index, Bajaj Auto, National Thermal Power Corporation (NTPC) and Tata Motors gained more than 100% in the past one year. All in all, this was not a year for banking stocks. Even Q4 numbers announced by HDFC Bank were below expectations. However, things are expected to change for the better going ahead.

Article is published in Economic Times - Click here

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