Why Nifty Bank has underperformed Nifty50 in the past one year
Nifty Bank index has given only 12.41% returns compared to 25.89% returns by the Nifty 50 index. Beneath this underperformance lies a story. Let us explore it in detail:
Investors preferred public sector banks (BPSUs) to private sector banks. BPSUs largely finance institutional and corporate borrowers and private sector banks are known for catering retail credit needs. Despite strong credit offtake, stocks of private sector banks did not do well. There is a reason. Private sector banks were richly valued compared to BPSUs. In a high interest rate regime, value conscious investors preferred to stick to BPSU. The PSU rally also improved the sentiment around PSU bank stocks. However, these stocks have a relatively low weight (around 15%) in the Nifty Bank index. Hence the positive impact on Nifty Bank Index was not as much.
The largest stock in the Nifty Bank Index – HDFC Bank--with 29% weight remained under pressure through the year due to a variety of reasons. Investors have concerns about the challenges related to compliance and funding post the merger of HDFC Bank with its parent: Housing Development Finance Limited (HDFC). In the past one year, HDFC Bank's shares have lost 10.3%.
Another important reason for weak performance of banks' stocks is the regulatory actions by the Reserve Bank of India. RBI slapped fines to many lenders due to slippages in the areas of know-your-client, risk categorisation, and provisioning among others. Though, fines looked small in the context of the quantum of profits of banks. RBI
