Banks, financials trigger most correction from market highs

Banks, financials trigger most correction from market highs

Recent sell-offs in the markets that have triggered a sharp correction in the benchmark indices have mostly taken place in the banking counter.

The benchmarks recovered from their March lows and rallied to their fresh highs on July 20, but have since seen a sharp correction. While the 30-share Sensex has declined 3.21% since then, the broader Nifty has shed 2.73%. In comparison, the Bankex and Nifty have lost 5.27% and 4.54%, respectively.

Analysts say that the banking and financial sector is often considered the backbone of any economy, which explains the interest of both foreign institutional and domestic investors in the counter.

“India’s banking sector has been resilient of late, and the healthy balance sheets coupled with strong credit growth has led the gains. However, while earnings have been more or less in line with expectations, there is considerable concern of net interest margin expansion, going ahead,” said an equity fund manager who did not wish to be named.

He pointed out that the surprise on incremental CRR has stumped investors, and near-term sentiment has taken a hit, even though the measure is temporary.

In fact, a look at the data suggests that of the last seven instances of a major crash in the benchmarks, banking stocks have triggered the fall. Since 2000,

the banking index has slumped more than the benchmark in all but one instance.

However, in 2000, the slump was triggered by the crash in the IT sector in the aftermath of the ‘dot-com crash’ in the US. That year, the Sensex and Nifty fell 34% and 30%, respectively, between February 11 to May 22. However, while the Bank Nifty declined 16.5% during the same timespan, the Nifty IT index nosedived 58%, according to Bloomberg data.

All of the subsequent instances of a sharp correction in the indices following a market high were triggered by the banking indices. This includes the global financial crisis or GFC of 2008, as well as the period just before the Covid-induced lockdown of 2020.

“Banking is usually considered the barometer for market mood. In 2008, it was the impact of the global crisis on the Indian financial system. But Indian banks now are largely insulated from global events,” said market analyst Ambareesh Baliga.

He said that banking stocks are turning weak now because most of the positives have been priced in. “In Q1, the NIMs peaked, and will either remain stable or contract as deposit rates could catch up,” he added.