PSU banking stocks witness selling pressure; gold prices at its peak…
The market extended losses in last couple of hours of trade on
Friday, falling more than 340 points intraday on the Sensex despite positive
global cues. The dip in all sectoral indices as well as mid-smallcaps indicated
that sentiment at traders and investors’ desk may have remained weak ahead of
weekend, especially due to lingering concerns over banking stocks after the PNB
fraud case. The index closed down 286.71 points or 0.84 percent at 34,010.76. Volatility
in crude oil prices and increase in trade deficit also hit market sentiment.
For the week, Sensex gained more than 200 points in morning on
positive global sentiment, but as the day progressed, it wiped out all those
gains and shed nearly 500 points from day's high, especially after top PSU
lenders SBI and Bank of Baroda declared their exposure to the PNB fraud case
that raised concerns over risk management in banking space.
India’s benchmark equity indices declined nearly one per cent on
Friday even as global peers rallied as widening of the current account deficit,
the $2-billion fraud at Punjab National Bank (PNB) and index provider MSCI’s
warning weighed on investor sentiment. The Sensex fell 0.8 per cent to 34,010,
while the Nifty50 index fell 0.9 per cent to 10,452.3, its lowest close since
January 3. The losses came despite global markets gaining by more than a per
cent as the yield on the 10-year US Treasury softened below 2.9 per cent.
Foreign institutional investors (FIIs) sold shares worth Rs 11
billion on Friday, taking their eight-day selling tally past Rs 10,000 crore.
The worst performer among the Sensex components were State Bank of India (SBI)
which fell 2.6 per cent, followed by YES Bank and ICICI Bank which declined 2.5
per cent and 2.3 per cent respectively.
Gold prices on Friday jumped 0.23 per cent in Mumbai to hit the
highest point in about 15 months since demonetisation in November 2016. The
price of standard gold (995 purity) moved up by Rs 70 to open at Rs 30,645 per
10 gm in Zaveri Bazaar. In November 2016, bullion was traded at Rs 30,600 per 10
gm in official transactions. Unofficially, however, gold was traded even at Rs 45,000 per 10 gm. The movement in gold prices in India is largely dominated by fluctuations in
world markets. In the benchmark London spot market, gold was trading at $1,361 an ounce (28 gm) in early trade on
Friday afternoon. This is the highest level since August 2016. Investors are switching
to gold after the collapse of cryptocurrencies such as bitcoin. There
has been a confluence of factors supporting the rise in gold prices, which remained low for more than a year. The US
interest rate hike, which kept gold prices subdued over the last one year, has started
working in its favour due to inflationary pressure.
Thanks to bitcoin’s decline, the investment demand has returned.
Additionally, a weaker dollar has also helped gold’s upward move. Gold traders
see gold’s immediate resistance at $1,375 an ounce and thereafter $1,430 an ounce.
The fundamentals are supporting the rise in gold prices. The data compiled by the World Gold Council (WGC) showed a 6 per cent increase in the global gold demand during the October-December quarter to 1,095.8
tonnes.Global exchange-traded funds (ETFs) added
202.8 tonnes in 2017.
Shares of public sector banks continues to trade lower for the
fifth straight trading session with the Nifty PSU Bank index hitting an over
three-month low after the Reserve Bank of India (RBI’s) revised framework on
resolution of stressed assets and the detection of about Rs 144 billion
fraudulent and unauthorised transactions by the Punjab National Bank (PNB) at
one of its branches in Mumbai.
Nifty PSU Bank index hit an intra-day low of 3,190, its lowest
level since October 24, 2017, a day on which the government unveiled an
unprecedented Rs 2.1 trillion package for recapitalisation of the PSU banks.
The index had recorded its sharpest single day rally of 30% on October 25, post
announcement of recap plan. PNB, Union Bank of India, Corporation Bank, Dena
Bank, Bank of Maharashtra and Syndicate Bank hit their respective 52-week lows,
while Oriental Bank of Commerce, Allahabad Bank, Andhra Bank and Bank of India
were trading close to their 52-week lows on the National Stock Exchange (NSE).
In past three trading sessions
Most global markets posted their biggest weekly advance in
nearly a year but Indian equities ended the week unchanged.
Nifty PSU Bank index was down 8%, has fallen 26% from its
52-week high level of 4,335 recorded on October 26, 2017 in intra-day trade. A
combined market capitalization (market-cap) of 22 PSU banks has declined by
around Rs 300 billion since February 12, 2018. PNB has seen one-fourth or Rs 96
billion market-cap erosion in three trading days after the bank on February 14,
2018, issued a letter to the stock exchanges that it had detected fraudulent
and unauthorized transactions at one of its branches in Mumbai of US$ 1.77
billion. RBI announced an overhaul of non-performing assets (NPA) resolution
and provisioning late on Monday, February 12, night. According to us, this
simplifies the earlier system and, we believe, moves toward comprehensive
resolution of most stressed assets by FY20. This will accelerate NPL
recognition and provisioning, though the pace of provisioning is still slower
than what it would be under IFRS/Ind-AS. It is incrementally negative for PSU
banks. There could be an immediate negative reaction to the PSU banks as
consensus downgrades on BPS starts to kick in. Our worry is that the
provisioning cycle will stay extended to FY20E under the new guidelines and
this will act as a cap on re-rating for the PSU banks.
After hitting a panic bottom of 10276,
Nifty50 is stuck up in a narrow range of 10,636-10,398 mostly due to domestic
factors whereas Global markets witnessed decent rallies. Indices like Brazilian
Bovespa, Russian RTSi erased around 60 percent of their losses whereas Dow
recouped around 50 percent of its recent losses. Hence, once these domestic
concerns are addressed to the satisfaction of the market even Indian indices
should take part in the global rally. The fact that market has not seen follow
through sell off post ‘PNB scandal’ is clearly suggesting that bulls are more
interested in current market.
Considering the recent correction, we
believe there are many opportunities available to investors. We recommend
investors to be stock specific and consider companies with good earnings
visibility at a decent valuation.