Bank Nifty will underperform the Nifty

By: Arjun Parthasarathy

The banking sector is definitely in for a rough time. The sector is facing multiple headwinds in the form of high cost of liquidity, rising bond yields and faltering credit growth. The sector is also likely to see higher provisioning for sectors such as real estate, telecom and infrastructure as these sectors have been hit the hardest due to rise in interest rates, corruption scams and inflation. The bank Nifty has returned a negative 6% calendar year to date reflecting the poor outlook for the sector. However, the Nifty itself has returned a negative 9.9% calendar year to date, thereby showing the Bank Nifty in a better light with relative outperformance on the downside. This is set to change.

The Bank Nifty will start significantly underperforming the broad market, both on the downside as well as on the upside. The first quarter 2011-12 results will not be rosy for the sector. On the investment book front, there is unlikely to be any good news. Bond yields have risen by around 50bps in the April-June quarter and banks will be making provisions for depreciation in yields in their AFS (Available for Sale) portfolios rather than showing any profits. There will be no consolation even if portfolio maturities are low, as bond yields have risen across the curve. 

Credit growth has been anemic in the April-June quarter. RBI data as of 3rd June 2011 shows that total outstanding non food credit was Rs 39,06,439 crores. The outstanding non food credit as of 8th April 2011 was Rs 39,06,480 crores. Going by this data non food credit growth was actually negative this quarter. Hence credit growth on a quarter on quarter basis is likely to be negative. The first quarter is usually a quiet period for bank lending, as it is the beginning of the fiscal year and corporates usually firm up their borrowing plans in the first quarter. However, the absolute lack of credit growth is definitely a sign of worry.

Banks are losing risk appetite after the exposure of corruption scams. The telecom sector had borrowed around Rs 100,000 crores to fund the 3G spectrum licenses in June and July last year. Banks have been lenders to the telecom sector, but after the 2G scam surfaced late last year banks have become nervous on lending to the sector. The sharp fall in valuation of large telecom operators such as Reliance Communication (RCOM) and GTL and GTL Infra that have lost 50% and 78% and 72% in market capitalization year on year respectively is exposing highly indebted telecom sector companies vulnerability.  

The sharp rise in provisioning in the fourth quarter of 2010-11 made by the country