Banking: Macro factors Dominate price action

Banking: Macro factors Dominate price action

Market Outlook
by Shreya Anaokar Last Updated: 2022-06-03T12:10:05+05:30

Banks and financials have been underperforming in recent years. BSE's Bankex Index has gained 1.8% in the past year, 16.52% in three years and 54.77% over the past five years. In comparison, the benchmark Sensex has gained 6.6% in the past year, 39.45% in the 3-year period and 77.81% in the past 5 years.

While the lack of broader credit growth has resulted in investors being less interested in banks, the recent underperformance has been because of foreign investors removing their funds from the sector. Large lenders such as Kotak, Bank of Baroda, HDFC Bank, and Canara Bank have declined between 20% and 25% from their 52-week highs, whereas the other banks have plunged between 30% and 60%.

May was another muted month for the BFSI sector (Bank Nifty down marginally MoM). Fintech companies have recovered from the lows while the worst performers were from among the capital market players. Frontline banks saw a mixed performance HDFC Bank and ICICI Bank were flat, while AXS Bank and SBI Bank both declined by 6%. PSU bank stock index declined by ~6% for the month. On a three-month basis, BFSI sub-indices have performed weakly, with the insurance index outperforming other indices. On a 12-month horizon, PSU banks and Small Finance Banks have outperformed the Bank Nifty significantly. The macro factors are dominating the price performance currently. With the results season coming to a close last month, a strong recovery in earnings led by lower provisions is seen, which is driven by healthy improvement in asset quality ratios.

Daily payments data for May 2022 from RBI indicates that strong trends in payments continued. We are in a seasonally weak period from a retail spending perspective but the yearly growth trends are still quite solid, especially when we look at the credit card data. UPI transactions were Rs.10 trillion for the month of May also continue to show strong trends largely at the expense of debit cards, which have seen sluggish growth. Bank credit growth has accelerated further to 10% levels, primarily led by retail (up by 14% YoY) and MSME segments. Housing (up by 14% YoY) and credit cards (outstanding up by 30% YoY) are leading the recovery in loan growth in the retail segment. 

Post-Covid, the recovery in loan growth has been the most sluggish parameter as asset quality metrics show a healthy recovery and focus from all banks is seen, including public banks, to underwrite loans. The intent to consume credit from a borrower’s perspective has been weak but directionally an improvement with each passing month is seen.

As per latest data from RBI, deposit rates were flat MoM at 5.0%. Both private and PSU banks have started to increase their deposit rates. Wholesale deposit cost as measured by Certificate of Deposit rates has picked up as the rate cycle turns. The gap between repo and 1-year term deposit rate for SBI declined to 70 bps. However, G-Sec yields have now surpassed SBI term deposit rates.

Lending rates on fresh loans have been volatile over the past few months. In the past six months, fresh lending rates have declined for banks. The gap between fresh lending rates of private and PSU banks stands at 170 bps. The gap between outstanding and fresh lending rates has declined steadily and now stands at 120 bps. Bond yields seem to be trending upwards now. In recent months, the term spreads and credit spreads in the bond markets have declined from peak levels suggesting the expansion of net interest margins on the corporate book is unlikely going forward. 


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About the Author

Shreya Anaokar is a Content Writer at 5paisa. She has completed her Master’s in Finance and Graduation in Statistics from the University of Mumbai. 


Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.

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