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Why are bank stocks falling and how to look for good deals

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Why are bank stocks falling and how to look for good deals

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Bank stocks have traditionally been viewed as a proxy for the economy. If the economy is doing well, so are bank stocks. Conversely, bank stocks are the first to take a hit when the economy slips into a downtrend. In 2021, however, this co-relationship was tested. Even though the economy has recovered, bank stocks have been among the most underperforming of the stock markets. We take a look at the reasons for this trend and how you should play this trend.

Why are bank stocks underperforming?

For various reasons. Today’s fall is purely sentimental, due to developments at RBL Bank. But the most important trigger is the massive sale of bank stocks by foreign institutional investors (FIIs). Remember that foreign funds have overweight positions in the big banks. So when they start selling stocks, other investors get scared.

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

Not necessarily. Some of the outflows could be linked to money coming out of exchange-traded funds as investors seek opportunities in other markets. Additionally, as the US Federal Reserve and other central banks gradually tighten monetary policies and move toward rate hikes, foreign investors are shifting some of their funds to risk-free assets like Treasuries.

Are there other reasons for the decline of banks?

There is a growing perception that newly arrived fintechs could give even established banks a run for their money, due to their technological superiority. Concerns about the impact of COVID on businesses, as seen in 2020, are also a factor.

What is the best bet? Private sector (banks) or public sector (banks)?

PSU banks are always a business bet, with the exception of SBI. Quit SBI and most if not all PSU banks would have destroyed your wealth over a longer 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 gold mines and land mines. I think the distinction between banks is no longer the PSU or private banks. It is now between those who are doing well and adapting well to change and those who have asset quality issues or who are not adapting well.

What filters should an investor use to buy decrepit bank stock?

If the stock is down more than 50 percent, just give it a pass. The rule of thumb of the market is that if something has doubled it will double again and if something has halved it will again be halved. The biggest filter should be how the bank behaved in the last bear market – in terms of asset quality, the most important. You will notice that those who have performed well in the bear market will significantly outperform in the next bull market.

What are the triggers, good and bad, for the sector in 2022?

The persistent theme of the financialization of assets remains the biggest positive. India is a country with a young population and better penetration yet to reach 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 may be problems.

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

This strategy can work wonderfully if the fund manager can anticipate major banking trends and changes. For example, for a long time it was easier to be in HDFC Bank and Kotak and avoid ICICI and SBI. But last year, ICICI Bank and SBI significantly outperformed their famous peers. So take a look at the track record of the fund manager and see if he made such tactical changes on time. No one can time the high and the low, but you can adjust your positioning once the market verdict is clear.

(Edited by : Santosh nair)

Why are bank stocks falling and how to look for good deals

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