Foreign investors sell Nifty Bank futures on margin worries
AI Summary
Foreign portfolio investors (FPIs) have increased their short positions on Nifty Bank futures, selling ₹1,201 crore following disappointing net interest margins reported by major private banks. This selling pressure led to a 1% decline in the Bank Nifty index, although ICICI Bank showed resilience with a slight gain. Analysts suggest that current valuations of banks like HDFC Bank present a buying opportunity despite the cautious sentiment among FPIs.
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Foreign portfolio investors (FPIs) raised shorts on the Nifty Bank after major private banks reported a compression in net interest margins (NIMs)—the difference between interest earned on loans and paid on deposits—during the June quarter.
These investors net sold Nifty Bank futures worth ₹1,201 crore on Monday, after buying futures worth a net ₹1,441 crore on Friday, the day before lenders such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank reported their June-quarter results.
The selling in Nifty Bank futures was accompanied by an overall provisional sale of ₹1,121 crore in the cash market by the cohorts on Monday.
This caused the Bank Nifty to fall by 1% to 57,945, with HDFC Bank, Axis Bank and Kotak Mahindra Bank falling between 2% and 5.5%.
The Bank Nifty decline was cushioned by ICICI Bank, which gained 1.1% after a standout performance.
HDFC Bank reported a NIM of 3.26% in the first quarter of the current fiscal, down from 3.4% in the preceding quarter. In comparison, ICICI Bank's NIM grew by 4 basis points to 4.36%. A basis point is one-hundredth of a percentage point.
HDFC Bank has the highest weighting of 19.30% on the Nifty Bank, followed by ICICI Bank at 14.16% as of 30 June.
The FPI futures selling is a hedge against further uncertainty in underlying prices, as financial services shares constitute 31% of FPI equity assets worth $724 billion as of 15 July, said Sudhir Joshi, consultant at Khambatta Securities, citing depository data.
Futures are used by investors to hedge against price risk. A buyer of the underlying shares shorts futures to protect her share portfolio.
“There is some caution among FPIs as low-cost funds (Casa deposits) of some banks are falling, raising the overall cost of funds and pressuring their NIMs,” he said.
Joshi expects the Nifty Bank to trade in a range of 56,000-61,000, with any downward pressure attracting buying interest from domestic investors.
Joshi's premise was echoed by Dr V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. “Valuations of the likes of HDFC Bank are compelling, and any further correction of say 1-2% will be a good buying opportunity. I am very bullish on ICICI Bank and bullish on HDFC Bank,” he said.
HDFC Bank was trading at 2.57 times its book value on Tuesday, while historically its price-to-book has been above 4, according to Vijayakumar, who argued for a compelling valuation.
HDFC Bank's price-to-book value is just above that of State Bank of India, which traded at 2.33 times.
ICICI Bank, which outperformed all other major lenders in the June quarter, traded at a P/B ratio of 4.06.
The Nifty Bank has veered between a 52-week high of 61,764.85 and a 52-week low of 49,954.85.
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