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Bank Nifty prediction: Can Indian banking stocks regain growth?

By Mensholong Lepcha

Edited by Jekaterina Drozdovica

17:33, 25 March 2022

Bank Nifty prediction
Bank Nifty prediction: Can Indian banking stocks regain growth?

India’s financial sector saw foreign investors pull out about $1.3bn in the month of February, as risk-aversion took centre stage following Russia’s invasion of Ukraine. 

The Nifty Bank Index, which is colloquially referred to as Bank Nifty, tracks the largest banking stocks in India. The index lost about 9% in February compared to Indian benchmark Nifty 50 Index’s loss of over 4%.

The fact remains that, even before the conflict in Europe, foreign investors had been unwinding their investments in Indian banks. 

February’s sell-off took foreign portfolio (FPI) outflows from the sector to four straight months, data from Jefferies showed. It will come as no surprise that the Nifty Bank has underperformed the Nifty 50 Index over the last 12 months.

In this article, we will take a look at the Indian banking sector and what factors could shape the Nifty Bank prediction for 2022 and beyond.

What is Bank Nifty? Biggest constituents 

The Nifty Bank Index is one of the most followed sectoral indices in India. The index comprises the 12 most liquid and largest banking stocks listed on the National Stock Exchange of India.

HDFC Bank (HDB) is the biggest constituent of the Nifty Bank Index with a weightage of 26.27%, as of March 2022. ICICI Bank (IBN) is the second biggest constituent, with a weightage of 22.25%. 

Top Nifty Bank constituents by weightage*

Axis Bank (AXB) and State Bank of India (SBI) Bank are the third and fourth biggest constituents by weightage in the index at 12.35% and 11.78%, respectively. Kotak Mahindra Bank completes the top five with a weightage of 11.67%.

The top five constituents make up about 84% of the weightage on the Nifty Bank Index.

The remaining constituents of the Nifty Bank Index are AU Small Finance Bank, Bandhan Bank, Federal Bank, IDFC First Bank, IndusInd Bank, Punjab National Bank and RBL Bank.

SBI and Punjab National Bank are the only state-owned banks in the index, while the rest are private-sector banks.

Price performance and analysis

Since the bottom of the pandemic-induced equity market crash in March 2020, the Nifty Bank Index has bounced back over 100%, as of 25 March 2022.

Over the past one year, the Nifty Bank Index has returned over 6% compared to the benchmark Nifty 50 index’s return of 18.2% in the same period, according to Nifty Bank historical data.

The past six months have seen the Nifty Bank Index and the benchmark Nifty 50 index fall by 7.2% and 3.9%, respectively, as of 25 March 2022. 

Nifty Bank Index, 2017 - 2022

In the past one year, ICICI Bank has been the one of the leading performers in the Nifty Bank Index, posting a return of over 21% compared to HDFC Bank’s loss of 3.6% in the same period. 

State Bank of India is the top performing stock in the Nifty Bank Index over the past one year. The state-run bank has jumped over 37% in the period. Federal Bank is the second best performer in the same period, up over 27%.

Over the past one year, seven out of 12 constituent bank stocks in the Nifty Bank Index have posted negative returns, with RBL Bank and IDFC First Bank slumping over 30% each.

In terms of Bank Nifty technical analysis, the overall short-term sentiment was bearish at the time of writing (25 March). While a neutral relative strength index (RSI) of 46.38 did not signal a trend reversal, the Nifty Bank was trading below its five- and 10-day moving averages, signalling a downward trend. 

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Indian financial sector

To understand the recent underperformance of the Nifty Bank Index, let’s look at its biggest constituent, HDFC Bank, which takes up over a quarter of the index weighting and therefore is its biggest price driver. 

Over the past decade, HDFC Bank has been a darling of domestic and institutional investors. The firm became the largest bank by market capitalisation in the country, as investors flocked to it for its sound management and prudent risk allocation at a time when India’s financial sector was going through one of its worst phases.

However, over the last 12 months, HDFC Bank has posted negative returns of 3.6%. In December 2020, as seen on the share price chart below, the price plummeted as HDFC Bank was banned by the nation’s central bank from issuing new credit cards and introducing new digital initiatives, due to recurring outages to its digital banking services. 

NDFC Bank stock price, 2017 - 2022

In 2021, the bank was also slapped with an Rs 100m fine by India’s central bank for violating regulatory compliance in its automobile loan portfolio. With over one-fourth weighting in the Nifty Bank index, HDFC Bank’s slump in 2021 weighed heavily on Bank Nifty.

India’s financial sector has also been suffering from muted credit growth that was exacerbated by the Covid-19 pandemic. As businesses in India suffered from the economic fallout brought on by the pandemic, banks were forced to restructure loans to avoid an industry-wide default scenario. 

With economic recovery hampered by multiple Covid-19 waves, rising inflation and global monetary tightening, investors will be concerned about the asset quality on the books of banks.

“Bank credit growth is showing signs of gradual recovery, although flow of credit to lesser rated corporates continues to be tepid,” said India’s central bank, Reserve Bank of India, in its latest Financial Stability Report.

The central bank added that investors should monitor closely the stocks of micro, smaller and medium-sized companies in the microfinance sector amid signs of incipient stress for those firms. 

“The phased recognition of stress from banks’ more vulnerable exposures, including loans to beneficiaries of emergency loan schemes and Covid-19 restructured loans, will contribute to future stress but a more gradual unwinding of restructured loans into bad loans over two-three years after FY22 will give customers more time to pay, mitigating the risk for bank financials,” said Fitch Ratings.

The agency added that further waves of the Covid-19 pandemic pose a serious risk to the sector. The credit rating agency said, “The possibility of the regulator offering more forbearance to support banks cannot be ruled out if economic recovery were to be delayed,” and added that a “bad bank” could be used to “clean up banking-system stress.”

Bank Nifty prediction: Analyst views

Jefferies, in its India BFSI monthly for March 2022, noted an “encouraging” pick-up in corporate and retail credit growth in February 2022. 

When asked if India was on track to a credit growth cycle, Aditya Shah, chief investment officer of Mumbai-based fund manager JST Investment, concurred and said in an emailed response to Capital.com:

“Yes. India has had four years of very poor credit growth. As the economy continues to recover from Covid-19 aftershocks, the credit will start flowing back into the economy and lenders will go in an upcycle over the next 3-5 years.”

On the downside, Shah added that rising inflation “is overall negative for the Indian economy, and therefore negative for the banking sector.” For the short-term, Shah said elevated crude oil prices could negatively affect the Indian stock market and the Nifty Bank Index.

India’s inflation has stayed above the central bank’s target band of 2% to 6%. However, the Reserve Bank of India (RBI) has kept interest rates steady despite global peers embarking on a monetary tightening cycle. A dovish RBI is currently favouring growth but it could be forced to raise interest rates in order to tame inflation and on foreign currency pressures, which would shape the Bank Nifty forecast.

In terms of Bank Nifty future prediction, Fitch gave a “neutral” outlook rating to the Indian banking sector for 2022, saying that the prospect of bank credit growth outpacing nominal GDP growth remains dim. The ratings agency said it expects private banks to lead the banking sector recovery in 2022, while it expects state banks to remain “a drag on sector performance”.

“Fitch expects banks, especially those that are state-owned, to remain largely risk-averse in the face of uncertainties unless significant recapitalisation, or asset sales to the newly formed bad bank, can offload legacy risks and adequately compensate against incipient ones,” explained Fitch Ratings.

India’s proposed bad bank has received regulatory approval in late-January 2022. Fitch said that the bad bank could offload significant legacy risks from bank books. 

However, Fitch added that India’s bad banks could face operational delays and regulatory challenges as the proposed bad bank is said to be composed of two separate entities – one for bad debt acquisition and one for bad debt resolution.

Note that analyst views and analysis can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing, and never invest or trade money you cannot afford to lose.

FAQs

What are the 12 banks in the Bank Nifty index?

The index comprises the 12 most liquid and largest banking stocks listed on the National Stock Exchange of India. HDFC Bank (HDB) is the biggest constituent of the Nifty Bank Index with a weightage of 26.27%, as of March 2022. 

ICICI Bank (IBN) is the second biggest constituent of the Nifty Bank Index, with a weightage of 22.25%.

Axis Bank (AXB) and State Bank of India (SBI) Bank are the third and fourth biggest constituents by weightage of the index at 12.35% and 11.78%, respectively. Kotak Mahindra Bank completes the top five with a weightage of 11.67%.

The remaining constituents of the Nifty Bank Index are AU Small Finance Bank, Bandhan Bank, Federal Bank, IDFC First Bank, IndusInd Bank, Punjab National Bank and RBL Bank.

Is Bank Nifty bullish or bearish?

Over the past one year, the Nifty Bank index has returned over 6% compared to benchmark Nifty 50 index’s return of 18.2% in the same period. The past six months have seen both the Nifty Bank Index and the benchmark Nifty 50 index fall, by 7.2% and 3.9%, respectively, as of 25 March 2022.

How do I invest in Bank Nifty?

You can get exposure to the Nifty Bank Index by buying an exchange traded fund (ETF) that tracks the index’s performance.

Markets in this article

AXB
Axis Bank
77.66 USD
-1.4 -1.780%
IBN
Icici Bank - ADR
29.42 USD
-0.09 -0.310%

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