Banking stocks have traditionally been seen as a proxy for the economy. If the economy does well, so do banking stocks. Conversely, banking stocks are the first to take a beating when the economy slips into a downtrend. In 2021, however, this co-relation has been tested. Even as the economy has been on the mend, banking stocks have been among the biggest underperformers on the bourses. We look at the reasons for this trend, and how you should play this trend.

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Why are bank stocks underperforming?

For a variety of reasons. Today’s fall is purely sentiment-led, because of the developments at RBL Bank. But the bigger trigger is the heavy selling of bank shares by foreign institutional investors (FIIs). Remember, foreign funds have overweight positions in large banks, and so when they start dumping shares, other investors take fright.

Does this mean that FIIs are bearish on the banking sector?

Not necessarily. A part of the outflows could have to do with money flowing out of exchange-traded funds as investors look for opportunities in other markets. Also, with the US Federal Reserve and other central banks gradually tightening their monetary policies and moving towards rate hikes, foreign investors are shifting a portion of their funds into risk-free assets like treasury bonds.

Any other reasons for the bearishness on banks?

There is a growing perception that the newly arrived fintechs could give even the well-established banks a run for their money, by virtue of being technologically superior. Concerns about the impact of COVID on businesses, like was seen in 2020, is also a factor.

Which is a better bet? Private sector (banks) or public sector (banks)?

PSU Banks are always a trading bet with the exception of SBI. Leave SBI and most if not all PSU Banks would have destroyed your wealth over a larger period of time. But PSU Banks can be a great trading bet if you can time your entry and exit well. Private Banks on the other hand have a combination of Goldmines and landmines. I think the distinction between Banks is no longer PSU or private banks. It’s now between those doing well and adapting well to changes and those who have asset quality issues or not adapting well.

What filters should an investor use to buy a beaten-down bank stock?

If the stock is down over 50 percent, just give it a pass. The golden rule of the market is that if something has doubled it will double again and if something has halved, it will halve again. The biggest filter should be how the bank did in the last bear market – in terms of asset quality most importantly. You will notice that the ones who did well in the bear market will outperform big time in the next bull market.

What are the triggers—good and bad—for the sector going into 2022?

The ongoing theme of financialisation of assets remains the biggest positive. India is a country with a young population and the penetration while better now still has to happen to the last mile. The number one worry remains on the economic front – if there is a massive third wave and it impacts the recovery then there can be problems.

Does it make sense to play the banking story through a dedicated sector fund?

This strategy can work brilliantly if the fund manager can pre-empt the major Banking trends and shifts. For example, for long, it was easiest to be in HDFC Bank and Kotak and avoid ICICI and SBI. But last year, ICICI Bank and SBI have majorly outperformed their famed peers. So go by the track record of the fund manager and see if he/she has made such tactical switches well in time. Nobody can time the top and bottom but you can adapt your positioning after the market’s verdict becomes clear.

For a ball-by-ball commentary on today's (Dec 27) trade, please click here

(Edited by : Santosh Nair)

First Published:Dec 27, 2021 1:24 PM IST