The global turmoil in the banking sector has made analysts cautious, who advise that investors stay away from stocks of this sector till the overall sentiment improves.
The recent trouble for the banking sector started with the collapse of US-based Silicon Valley Bank (SVB), Silvergate Capital and Signature Bank.
On its part, Moody’s Investors Service has also cut its outlook for the US banking system to ‘negative’ from ‘stable’, citing the run on deposits at these three banks that led to the collapse of these banking majors in less than a week.
Credit Suisse, meanwhile, got a $54 billion lifeline to shore up its liquidity.
According to reports, it is the first major global bank to be given such a handout since the global financial crisis (GFC) back in 2008.
That said, though there are no serious fundamental issues, like those during the 2008 financial meltdown, V K Vijayakumar, chief investment strategist at Geojit Financial Services, suggests investors wait on the sidelines for now and let the storm pass.
“Since all banks are interconnected, fears of banking contagion are impacting markets.
"Credit Suisse has been going through problems for more than a year now, though the other European large banks are strong.
"The crisis in a few US regional banks are unlikely to impact the large banks (in the US) and their financial system.
"The authorities are moving fast to contain the problems. Investors should not panic and wait for this storm to pass.
"Safety is in fundamentally strong large-caps,” he said.
Thus far in calendar year 2023 (CY23), the banking index has been an underperformer.
The Nifty Bank index has slipped around 9 per cent in CY23 as compared to nearly 6 per cent fall in the Nifty50 index.
Among stocks, State Bank of India (SBI) and Punjab National Bank (PNB) have been the worst hit - falling over 15 per cent each in CY23.
IndusInd Bank, Bank of Baroda, Bandhan Bank and Axis Bank have lost between 11 per cent and 15 per cent during this period, ACE Equity data show.
Bank stocks, said Gaurav Dua, senior vice-president, head of capital market strategy, Sharekhan by BNP Paribas, are likely to underperform going ahead as he does not see the problems engulfing the sector going away soon.
“Global developments in the banking sector are unlikely to settle in a hurry.
"In this backdrop, banking stocks not only in India but globally, will underperform.
"Investors will be better off in reducing their exposure to bank stocks, especially the public sector banks (PSBs) and non-bank finance companies (NBFCs) who are into unsecured loans,” he suggests.
Credit Suisse, according to analysts at Jefferies, is more relevant to India's financial system than SVB as it has over Rs 200 billion in assets (12th among foreign banks), presence in derivatives market and funded 60 per cent of assets from borrowings, of which 96 per cent is up to 2 months.
“Given the relevance of Credit Suisse to India's banking sector, we see softer adjustments in assessment of counterparty risks, especially in the derivative market.
"We expect RBI to keep close watch on liquidity issues, counterparty exposures and intervene as necessary.
"This may also lead to institutional deposits moving more towards larger/ quality banks,” wrote Prakhar Sharma and Vinayak Agarwal of Jefferies in a note.
Nifty Bank, according to Dua of Sharekhan by BNP Paribas, has support at 38,500 levels, while the Nifty50 index has support at 16,800 levels.
“If these levels get taken on out the downside, panic can spread and we can see a sharp fall in both these indices,” he said.
