Bank stocks on a tear: Here's how you should approach them

Bank shares have witnessed a major upmove this morning, following an Economic Times report that said, quoting sources, that the Reserve Bank of India has pruned the list of companies whose loans need to be set aside for provisioning in the fourth quarter.The decision appears to be part of the central bank's asset quality review (AQR) exercise that it started from the third quarter, in which it had asked banks to set aside provisioning for specific accounts that were being considered standard assets.The ET report said the new list sent out by the Reserve Bank to banks has left out names such as debt-laden JP Associates, which has embarked on a major asset sale drive in order to raise funds.In response, shares of ICICI, which reportedly has about Rs 12,000-13,000 crore exposure to JP, are up over 7 percent. SBI was up 4.2 percent. The Bank Nifty has risen 2.4 percent.Another trigger that has powered bank stocks today is a note by brokerage Credit Suisse that says the Indian steel cycle has bottomed out and this may again benefit lenders such as ICICI. But banking expert Hemindra Hazari said he was surprised with the market's reaction to the news."Nothing has fundamentally changed for these companies. Banks are still sitting on assets as securities that do not hold much value. If a proper valuation is done, they will find a lot of these assets do not exist," he said."A lot of the assets that have been restructured under schemes such as SDR and 5:25 will have to be qualified as NPAs at some point. I do not believe that Q4 will be the peaking out of the NPA cycle," Hazari said.He added that long-term investors should continue to remain wary of bank stocks as there was "still a lot more pain to come". Traders can lighten up their positions and book profits into the ongoing rally, he said. Analyst Prakash Diwan agreed with Hazari's assets but added that some banks, such as Bank of Baroda, should benefit immediately from writebacks, if the news is correct.He, however, added that he was still more positive on NBFCs and microfinance institutions -- including today's market debutante Equitas.