Bank stocks: Volatility means volatility is welcomed in the stock market, as it gives you an opportunity to earn good returns. But volatility also indicates that Dalal Street is a sector in a state of uncertainty.
The same has happened in the case of banking stocks in India. In the last six months, volatility has outperformed the Nifty 50 in the Bank Nifty index. According to data provided by Rachna Makhija, Senior Research Analyst, iFast Financial India, the average daily return of Bank Nifty index has diverged by 1.1 per cent compared to Nifty 50 in the last six months. On the other hand, Nifty 50 has shown a deviation of 0.81 per cent.
Private banks remain in a circle
“Bank Nifty has been more volatile than Nifty due to the smaller number of participants and the more high beta nature of banking stocks,” said Deepak Jaisani, Head Retail Research, HDFC Securities. He said, among the banks, private banks are in a circle, while PSU banks are performing well in the hope of improving asset quality and privatization.
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Daily volatility has decreased
Asani said, the daily volatility in the Nifty Bank index has come down from 2.28 per cent (January) to 1.67 per cent (July-December, 2021). Bank stocks are cyclical in nature and perform best in comparison to other sectors and broader economy. This is the reason why they have more ups and downs.
The banking sector has underperformed the benchmark index in the past six months due to asset quality concerns and tepid credit growth, leading to heavy selling by foreign investors.
RBI Report
The recent Financial Stability Report of the Reserve Bank emphasizes that lenders are yet to come out of asset quality issues. The report expects an increase in bad loans, which will hit the earnings of the banks. Another reason for volatility in bank stocks is concerns over heavyweight stocks such as HDFC Bank, India’s most valuable bank, which has underperformed the market for the second year in a row.
HDFC Bank was banned from issuing credit cards for eight months in FY21. However, with the lifting of restrictions and showing good loan growth, the stock could benefit further.
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The performance of Nifty Bank has been weak
In the last six months, the Nifty Bank index has gained 7.05 per cent, while Nifty 50 and Nifty Financial have gained 13.20 per cent and 10.39 per cent respectively.
Vinod Nair, Head of Research, Geojit Financial Services, said, “Banks may underperform in the short term as they are still going through uncertain times. However, we expect the financials of the banks to improve during the year. We have a positive long-term outlook on the sector and recommend taking positions among top private banks with reasonable valuations, strong balance sheet, credit growth and improving economic growth.”
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