is it a good time to put your money in the banks?

on March 17, as news trickled through of the US Fed interest rate hike, global markets responded with positive springs from their relatively oversold positions. both Indian benchmark indices - the NSE and the BSE - climbed 1.84% each, with one of the top gainers being HDFC Ltd which jumped 5.4% on the day. except for IT every sectoral index on the NSE closed in the green, with Realty leading the pack at 3.13% followed closely by Financial Services at 2.77%.

diligent dues

HDFC was not alone in its ascent on March 17 as a host of other financial service stocks saw significant gains. this is in line with the market revival of sorts since March 8, with a look at the biggest gainers since then, throwing up plenty of banks and financial service companies in addition to petrochemical and metal firms.

one factor that may be driving this optimism is the fact that India’s monthly debit-bounce rate was at its lowest in February 2022 since May 2019. debit-bounce rate refers to the percentage of automated EMI payment transactions that fail due to insufficient balance in the corresponding bank account. a lower rate implies that more loans are being paid back on time, which in turn improves the ‘asset quality’ of the banks and allows them more working capital to invest and grow. in February 2022, the bounce rates were 22.4% of transactions by value - marginally above the average levels of around 21.5% seen during the pre-pandemic period of February 2018 - February 2020.

stars align

there are a couple of other reasons why global markets are on a surge. one is China’s promise of meting out more stimulus to aid its economy which has been hit by a fresh spate of Covid-19 cases. the other is Russia and Ukraine appearing to make a breakthrough in their peace talks. both are favourable signs for the global economy, which has dealt with more than enough uncertainty and volatility since the outbreak of the pandemic.
at the same time, technical chart indicators appear to show a recent bullish switch for several financial stocks such as SBI, ICICI Bank, Kotak Mahindra Bank, IndusInd Bank, Canara Bank, Bank of Baroda, and Karnataka Bank.

improving loan repayment rates and the start of a global effort to rein in inflation are both good signs for stocks in the financial sector. as long as the news from China and Russia doesn’t throw up any unexpected shocks, one might expect global markets to retain this positive disposition and financial stocks to be chief among them.