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Bank stocks may do well during the downturn

Bank stocks may do well during the downturn
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First Published: Fri, Dec 19 2008. 10 52 PM IST

Updated: Fri, Dec 19 2008. 10 52 PM IST
One distinguishing factor of the current crash in equity markets has been the speed of the decline.
If we compare the current fall with the one in 2000, we find that by the middle of December 2000, the Bombay Stock Exchange’s benchmark Sensex index had fallen 30% from the peak on 14 February 2000. In contrast, by 15 December this year, the Sensex had fallen 54% from the peak on 10 January.
Banking stocks are usually a play on the economy, so it’s no surprise that they, too, have fallen far more in 2008 than in 2000. For instance, Axis Bank Ltd was down 55.3% from its peak this year to 15 December. In 2000, it was up 16.88% by 15 December. ICICI Bank Ltd, Bank of Baroda, Bank of India and State Bank of India stocks are down much more from their peaks this year compared with 2000.
Is that merely because the selling by foreign institutional investors this time has been far more severe? Not really.
A look at the net profit of these banks during the September quarters of 2008 and 2000 show that profit growth was higher in 2000 than in 2008, except for Bank of Baroda. In short, lower profit growth is also one reason for the steeper fall in the prices of bank stocks.
Also, part of the reason for the fall is that financial stocks have been in the eye of the storm this time. This is particularly true for lenders such as ICICI Bank. The slowdown will also be deeper this time than in 2000.
Having said that, falling interest rates present a great opportunity for banks to make money on treasury operations.
At the end of the last downturn on 31 March 2003, the Nifty index on the National Stock Exchange was down 42% from the peak it had reached in February 2000. In the same period, the Bank Nifty was up 16%. It indicates banks stocks could outperform by the time this downturn, too, ends.
Write to us at marktomarket@livemint.com
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First Published: Fri, Dec 19 2008. 10 52 PM IST