Bombay Stock Exchange (BSE) building is seen as Sensex plummets 2000 point due to Coronavirus outbreak, in Mumbai on Monday. (ANI Photo)
Bombay Stock Exchange (BSE) building is seen as Sensex plummets 2000 point due to Coronavirus outbreak, in Mumbai on Monday. (ANI Photo)

Why the Nifty Bank index is undershooting the Nifty 50 by a mile

  • Since 6 March, the day after the Reserve Bank of India placed Yes Bank under a moratorium, the Nifty Bank index has fallen 40.6%, a steeper fall than the 30.8% drop in the Nifty 50 index
  • Year to date, the Nifty Bank has tumbled 46.8% against Nifty 50’s drop of 35.9%

Financial stocks have been lurching from one crisis to another, starting from the Infrastructure Leasing and Financial Services Ltd’s collapse, to the fraud at Punjab and Maharashtra Co-operative Bank Ltd and now to the recent bailout of Yes Bank Ltd. Bank stocks had weathered the previous crises, but their performance in the past three weeks shows that all these worries are finally taking their toll.

Since 6 March, the day after the Reserve Bank of India placed Yes Bank under a moratorium, the Nifty Bank index has fallen 40.6%, a steeper fall than the 30.8% drop in the Nifty 50 index.

“The immediate impact of Yes Bank’s collapse will be seen on credit growth and consequently non-performing loans due to a lack of credit availability as banks will become more risk averse. Banks will most likely hoard liquidity and be very selective in credit disbursement," said Macquarie Capital Securities (India) Pvt. Ltd in a note to clients.

Out of favour
Out of favour


Year to date, the Nifty Bank has tumbled 46.8% against Nifty 50’s drop of 35.9%, led by stocks that have been highly exposed to the vagaries of the financial sector. Stocks of IndusInd Bank Ltd fell 79.3% year to date, while Bandhan Bank Ltd, Axis Bank Ltd, and IDFC First Bank Ltd saw their stocks lose between 57.5% and 68.3%.

However, even among lenders that are considered better off, only shares of Kotak Mahindra Bank Ltd have fallen at a lower rate compared to the Nifty.

Fears of an increase in non-performing loans and slow credit growth have hit bank stocks across the board.

A slowing economy increases pressures in the credit market, as defaults can wreak havoc with bank stocks. “A weak economy hits the market hard and vulnerable banks tend to get hammered the most," noted an analyst on condition of anonymity.

Also, Yes Bank’s additional tier 1 (AT 1) bonds were written off and this has impacted fundraising prospects for other lenders, which is crucial to maintain credit growth. “At end-FY19, AT-1 instruments topped 1 trillion, forming more than 8% of banks’ capital and this will only add to current capital crunch and may impact banks’ growth dynamics," said Edelweiss Securities Ltd in a note to clients.

The recent coronavirus outbreak has led to lockdowns in various districts, and will slow the economy further and result in bad debts.

Signs of stress in the unsecured retail loans market have also been unsettling investors.

Once the darlings of the stock market because of their ability to deliver steady earnings growth, the banking sector may now well end up dragging overall earnings growth. Some analysts had earlier estimated bank stocks in the Nifty 50 would deliver about 73% growth in FY21. To that extent, it’s quite a reversal of fortunes for these lenders and it’s little wonder that some of these are among the worst-hit in the market.

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