The Indian equity market has been under pressure in the month of April so far, as an incessant rise of COVID-19 cases makes the outlook of the market and economy hazy.
In this current spell of selling, banking stocks have been at the front. While Nifty is now 5 percent down from its peak of 15,431.75, hit in February, Nifty Bank has come down 15 percent from its peak of 37,708.75.
While PSU banks have fallen the most as the Nifty PSU Bank index is down 23 percent from its peak, the Nifty Private Bank index is down 15 percent.
Experts see the novel coronavirus pandemic as the biggest reason behind the poor performance of banking stocks, especially the PSU ones.
The second wave of COVID-19 in India and restrictions imposed by state governments are also seen as a negative for banking stocks as investors fear companies or even individuals may find it difficult to pay the loans and interest on time, which will put pressure on the asset quality of the lenders.
Stress tests by the Reserve Bank of India (RBI) indicate that the gross NPA ratio of the country's banking system could rise to 13.5 percent by September 2021 from 7.5 percent in September 2020. If the macroeconomic environment worsens and leads to a severe stress scenario, the ratio can surge to 14.8 percent.
Besides, there is caution ahead of the March quarter earnings of the baking players. Investors will focus on their asset quality as after the Supreme Court lifts its direction on non-performing asset (NPA) recognition, a clearer picture of their asset quality in wake of the pandemic will appear.
Last year's favorable base and lower provisioning requirement will boost earning numbers but earnings upgrades will depend on asset quality and business growth, brokerages point out.
Read: Private banks may post healthy numbers; all eyes will be on asset quality
The technical indicators are not showing any clear picture of Bank Nifty at this juncture.
"As the short-term trend of the Bank Nifty is down and negative, we would see a minor pull-back that could lift the index to 33,300," said Shrikant Chouhan, Executive Vice President (Equity Technical Research), Kotak Securities.
"The strategy should be to buy on dips between 32,000-31,800 and keep a final stop loss at 31,400 on a closing basis. On the higher side, 32,650 and 32,970 would be minor obstacles," Chouhan said.
Nagaraj Shetti, Technical Research Analyst, HDFC securities pointed out that the gap area of 32,400 is going to be a crucial overhead resistance for the banking sector and a sustainable move above this hurdle could open the next upside levels in the near term.
"The banking sector has been underperforming Nifty over the last many sessions and we observe a downtrend as per the negative sequence like lower highs and lows. Any upmove could be a sell-on-rise opportunity in the banking sector. Though the sector has been in the downtrend over the last few months, there is no indication or confirmation of any crucial bottom reversal at the lows," Shetti said.
Shetti believes a sustainable move above 32,400 is likely to open the next upside levels of 33,300 in the near term. Immediate support is placed at 30,700 levels, Shetti said.
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