Bank Nifty falls 5% from record high; short-term trend to remain negative, say analysts

Bank Nifty index traded flat with a positive bias on Friday following three consecutive sessions of decline this week. Gains in counters such as Kotak Mahindra Bank, IndusInd Bank, AU Small Finance Bank, and ICICI Bank were offset by selling pressures in Federal Bank, Axis Bank, and HDFC Bank shares.

Bank Nifty hit a record high of 53,357.70 on July 4 but has since fallen around 5%, driven by selling in bank stocks. This decline is attributed to weaker-than-expected earnings for the first quarter ending June 2024 and a broader sluggish sentiment in the Indian stock market following the 2024 Budget.

Analysts said the Q1 results of the banks so far have been mixed, with some large private banks disappointing, while smaller banks delivering good earnings. However, with the latest fall in share prices of banks, the valuations in the sector do not seem expensive.

“Bank stocks are unlikely to see any further big downfall. The valuations are not very expensive in the banking sector. However, the exposure to the sector is very high. We are not positive in this space in the short-term,” said Vinod Nair, Head of Research, Geojit Financial Services.

According to Avinash Gorakshakar, Head Research at Profitmart Securities, large banks so far have delivered disappointing results, while the earnings of smaller banks have been good.

“We have to be very selective in the banking sector on a stock-to-stock basis. The sectoral deposit growth has been sluggish and the net interest margins (NIM) have also been impacted negatively. Moreover, the RBI’s draft guidelines on Liquidity Coverage Ratio (LCR) are also likely to hit banks’ margins,” Gorakshakar said.

He remains negative on the banking sector for the short term, but expects banks to see steady growth in the 12-15 months period.

Speaking on valuations, Gorakshakar believes certain PSU banks such as Bank of Baroda and State Bank of India (SBI) are trading at decent valuations, along with smaller private banks like RBL Bank and IDFC First Bank.

Technical View

Since the announcement of Budget 2024, the Bank Nifty index continued its downward trajectory.

“We saw Bank Nifty breaking southwards after spending a few days within the congestion zone of 51,800 - 52,800. Considering the recent sell-off in the banking sector, it appears that bearish sentiment may persist, and any rebound could provide an opportunity to exit long positions. However, few key banking companies are about to present their quarterly numbers; which is likely to set the direction for the next course of action,” said Sameet Chavan, Head Research, Technical and Derivative - Angel One.

At present, the 51,200 - 51,400 zone is likely to act as an immediate resistance for Bank Nifty, whereas on the downside, support is visible in the 50,000 - 50,200 range, according to Chavan.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.