Bank Nifty looks weak both technically and fundamentally: EM expert Adrian Mowat

Emerging Markets strategist Adrain Mowat

Emerging Markets strategist Adrian Mowat shared a bleak outlook for Indian equity markets as hardening bond yields weakened investors risk-appetite from the past three months. Mowat stressed particularly on Indian banking stocks, saying that they look ‘weak’ as companies shared negative bag of second quarterly performance.

“I am a bit nervous about the Bank Nifty index as it appears weak from both technical as well as fundamental perspective. Fundamentally, Indian financial companies have been guiding towards negative earnings performance, and that makes me cautious on the overall financial sector,” explained Mowat.

On overall markets, too, the EM expert expressed caution, pointing to rising bond yields as the next worry. “I would follow the US bond market first and see if we could get any comfort over the next month, given the fact that bond yields do not break the 5 percent-mark threshold. Once this happens, investors would start adding risky assets, which includes Indian equities as well,” he said.

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On November 1, the Bank Nifty index was down 0.5 percent to day’s low of 42,604 levels, dragged by HDFC Bank, Kotak Mahindra Bank, and Axis Bank stocks. State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, however, attempted to trim losses.

The Bank Nifty index has suffered a decline of 6 percent in three months as against 3 percent drop in the benchmark Nifty50 index. Related-stocks from Bank Nifty like HDFC Bank, ICICI Bank, Kotak Mahindra Bank, IDFC First Bank, Bank of Baroda, and State Bank of India have slumped up to 11 percent during the same period.

In the September-ended quarter, majority of banking and financial companies complained of margin pressure due to lagged impact of repricing of the deposit book.

ICICI Bank, for instance, saw net interest margins (NIMs) contracting by 25 basis points (bps) on a sequential basis in the September-ended quarter (Q2FY24). On the other hand, banking sector’s bellwether stock HDFC Bank margins’ compressed by 70 bps quarter-on-quarter (QoQ) in Q2FY24.

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Axis Bank and Federal Bank, however, proved to be outliers on this front, as they posted a marginal increase in margins owing to rising yields on interest earning assets, which helped override margin pressure.

While most of the banks expect margins to normalise going ahead, market participants warn that rising cost of funds could swell margins for the upcoming two quarters.