Bank stocks rally: Investors ignore bad news

There was no dearth of bad news about banks in the second half of calendar year 2012, ranging from a sharp rise in non performing assets, a sluggish economic growth, downgrade in credit rating and so on. Yet, shares of many banks have delivered returns far better than Sensex.

For instance, Kolkata-based public sector lender Allahabad Bank reported 52 per cent decline in its net profit for the quarter ended September 30, 2012, on a year-on-year (y-o-y) basis, from Rs 488 crore to Rs 234 crore, mainly due to higher provision for non performing assets (NPAs), which went up from 0.69 per cent to 2.10 per cent on a y-o-y basis.

The share price of Allahabad Bank, did decline on November 5 when the results were declared. The rally since then has been spectacular, its  share closing at Rs 183.60 on Monday.

Another public sector lender, Bank of Baroda, reported a spike in its NPAs, up from 0.47 per cent in Q2, 2011-12, to 0.82 per cent in Q2, 2012-13. In its presentation to analysts, the bank acknowledged that the macro economic situation in the country was “non-supportive.”

The bank's share was languishing at its 52-week low on September 6 at Rs 609.55. The macro economic situation hasn't changed much since then, but the share has spurted to deliver a 44 per cent return to investors as of Monday.

In case of Bangalore-based state lender Canara Bank, two dampeners – 22 per cent decline in net profit for the second quarter declared on November 6 and a downgrade a fortnight later in its Viability Ratings due to challenges in its funding and asset quality by rating agency Fitch - have not affected its performance on the bourses.

Analysts attribute the rally to global liquidity and bottom-fishing. According to Vaibhav Agarwal, Vice President (Research) at broking firm Angel Broking, the rally has a lot to do with FII inflows. “Global liquidity has been very strong in the past few months and driving the rally in some of these stocks.” It’s a view that is shared by another analyst, Amit Khurana, Director (Research) at investment advisory firm Dolat Capital.

Vaibhav added that some investors have also resorting to “bottom-fishing”, picking up stocks that are available cheap, notwithstanding weak fundamentals, the logic being that these banks would do well in 2013-2014.
On private sector lenders like Karnataka Bank in the limelight, Vaibhav said that in the context of new banking licences, merger and acquisition buzz will only increase in future and some old private sector banks will continue to benefit from speculation.

Another analyst at an investment firm, who did wish to be identified, said that FIIs have turned bullish on bank stocks in the past few months that explains the rally and added that they are advising their clients to use this rally to exit.

During the period September 6, 2012 to January 7, 2013, the Sensex went up 14 per cent and BSE Bankex rose 26 per cent.