In trouble, by all accounts

Everything seemed fine with banking sector stocks until May 2013, as the CNX Bank Index registered a new, all-time high at 13,414, which was marginally higher than its 2010 peak of 13,303.

Many private sector banking stocks outperformed the index and registered new highs - IndusInd Bank, YES Bank and Kotak Mahindra Bank enjoyed spectacular rallies.

Banking funds that invest exclusively in the sector as well as in a few non-banking financial services companies, were not spared the onslaught when the tide turned.

While the Nifty has declined 9 per cent during the year, the CNX Bank Index tumbled approximately 26 per cent, thus underperforming drastically. Most of the banking funds too have taken a knock.

Multiple concerns

Banking stocks have been beaten down due to concerns such as increasing bad debts and lower loan demand. . The banking sector started to lose its value steeply after mid-July this year.

The RBI made a series of moves that saw liquidity being tightened and rates rise. This has increased banks’ funding costs.

However, some of the nationalised banks have been in trouble from as early as November 2010.

Most funds underperform

All banking funds, barring two, have underperformed the banking indices BSE Bankex and CNX Bank Index in the past one year. Here we look at the performance of banking funds over the past few years.

Only ICICI Pru Banking & Financial Services and Religare Invesco Banking did better than their benchmarks, declining 5 per cent and 10.8 per cent, respectively, compared with 12 per cent of the BSE Bankex and 11.5 per cent of the CNX Bank Index.

Even over a three-year time frame, these two funds have outperformed.

Sundaram Fin Serv Opportunities is placed atthe bottom of the list of eight banking funds as its NAV fell 15 per cent in the past one year and at a compounded annual rate of 10.4 per cent over a three-year period.

The largest scheme in the space, Reliance Banking, too has underperformed over the past few years.

ICICI Pru Banking & Financial Services had reduced its exposure to the SBI stock from 12.8 per cent holdings in January this year to 8.4 per cent in July and maintained its holding in HDFC Bank at around 21.7 per cent.

Lower exposure to SBI, ICICI Bank, Axis Bank and YES Bank, and higher weightage to HDFC and HDFC Bank has generally helped outperformance.

Sundaram Fin Serv Opportunities had exposure to stocks that fell heavily over the past couple of months - Axis Bank, YES Bank and IndusInd Bank, to name a few.

Technical view

The CNX Bank Index or Bank Nifty’s long-term uptrend came to an end in May 2013 with a peak of 13,414. Since then, the index has been on a medium-term downtrend. The short-term trend is also down.

Nevertheless, it is testing its significant long-term base in the band between 9,000 and 9,200 that provided support in the previous week.

A strong decline below this support will pull the Bank Nifty down to 8,500 initially, and then to 8,000 in the medium-term. The next important long-term support is pegged at 7,000.

But an upward reversal from the current support band can take the index higher to 10,000.

The index needs to rally above 10,500 to alter its short-term downtrend and move upwards to 11,000 and 11,500 in the coming months.

To alter its medium-term downtrend, the index needs to move above 11,500. In that scenario, it could move upwards to 12,500.

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