The Momentum is here to stay for Bank Nifty!
After remaining silent since January 2020, the Bank Nifty has picked up momentum in the past three months and comfortably outpaced the Nifty50. In the past three months, the Bank Nifty witnessed gains of around ~18%, whereas the Nifty50 gained ~12%.
In this article, we will discuss why this upward momentum for banks and other lending players are likely to persist potentially making Bank Nifty breach new heights.
Asset Quality - Two words but conveys tons of insights. The Single most important factor to determine the health of a lending institution. Gross Non-Performing Assets (GNPA) which is an indicator to gauge asset quality is in its best shape right now.
The asset quality especially in the Corporate and Retail segments is showing strong signs of revival. In the Corporate segment, the banks have undertaken a significant clean-up and have strengthened their underwriting practices. As per a recent study conducted by Crisil, the share of high-safety exposure in corporate advances has increased to 77% as of FY22 from 59% in FY17, while the exposure to below-par companies has come down to 7% from 17%.
In the retail segment, close to 50% of the portfolio consists of mortgage loans that are secured and have consumers with relatively better credit portfolios. Thus, the asset quality in this segment is expected to not deteriorate.
Capital Adequacy - A bank can only take advantage of the improving quality of customers if it has sufficient capital to lend. Over the past years, the capital ratios of the banks have significantly improved and most banks are sitting on healthy cash.
With cash or in other words ammunition on their side, the banks seem ready to fire!
Credit growth trend - Well, you may have cleaned up your assets and are sitting on cash but what would be the use of that excess cash if there is no demand for credit? Fortunately, this is not the case this time.
After a muted credit growth in the past couple of years, the demand has started to pick up. Retail and SMEs have driven credit growth. But now with improving Capacity Utilization, a significant reduction in the corporate tax rate, and government incentives under PLI for the manufacturing sector the corporate segment too is expected to join the party.
Growth to come with margin expansion - The special thing about this time is that not only will the top line grow at a good pace but the operating profit will be getting enhanced too. Empirical evidence and history suggest to us that rising interest rates are favorable for the net internet margins of the banks.
The banking sector is standing at the cusp of a broad-based credit up-cycle. The tailwinds are coming in from all directions. The retail demand will drive the corporate profitability & capacity utilization which in turn would drive corporate loans. Similarly, the improvement in the corporate segment would result in job creation and in turn drive retail demand. “Momentum Begets Momentum” - This physics principle would make sure the force stays with the banking segment.
Technical Outlook:
Nifty started the week on a positive note and even recovered significantly after a gap-up opening on Tuesday. However, it couldn't sustain at higher levels and slipped lower. Last week we highlighted that a bearish divergence was forming which could result in a slowdown in upward momentum. We have seen a significant correction from the recent highs and it seems that bears could drag the index even more. Immediate support is now placed around 17,200 and 17,000 levels. If the index breaks this level, then we could see it drag lower to 16,600. On the upside 17,500 could act as a resistance.
Expectations of the Week:
Globally the markets will be reacting to the much-anticipated GDP growth numbers of the USA. The GDP growth rate announced in the second quarter witnessed a drop of 0.6% which came in better than expectations after witnessing a steep fall of 1.6% in Q1. Global markets will have their keen eye on this figure as it could influence the future course of rate hikes by the fed. Back home, the outcome of the RBI MPC meeting will be taking the center stage. The retail inflation picked up again in August to 7% after declining for three months in a row. The market expects the repo rake to be hiked by 50 bps. Further, the data on Foreign Exchange reserves which have declined by 14% from their all-time high will keep the markets on their toes. Nifty50 closed this week at 17,327.35 down 1.16%.

What is driving the market - Noise or Facts?
Despite all the global headwinds, talks of inflation, and recession the Indian markets has seen renewed energy. The past couple of months has been encouraging. In the month of July Sensex gained 9.4%, whereas August witnessed gains of 1.5%.
The market in the short term primarily gets influenced by either facts or noise. The facts for obvious reasons act as a stronger indicator of the sustainability of a trend. Thus, it becomes important to understand what it is that is driving the market.
The following are some of the points that are been discussed far and wide in the market, let’s look at them individually ~
1. Economic Slowdown in the USA and Europe.
There have been a lot of talks about the de-coupling of India from the West. The opinion is that India will continue to witness growth despite the underperformance of its Western peers. But if we look through history the GDP growth rate of India and the USA have been fairly in line with each other. Depicting that any downward movement in the USA economy will have its trickle-down impact on India too.
2. But is the Recession in the USA truly bad for the Indian Market?
Holistically the markets move in cycles and it has the tendency to be forward-looking. Therefore, both the good and the bad news gets discounted before it has truly occurred. The news that the West could go into recession is no longer 'NEWS'. It has been fairly discounted by the market like it had discounted previous major events.
Thus, when the economy truly goes into turbulence most of the bad news is discounted by then. And markets when are in the middle of the chaos have limited downside and strong upside potential.
3. FII’s coming back but will it sustain?
One of the prominent reasons why markets had witnessed a number of steep movements in the past two years was due to the selling of FIIs. From Jan to Mar 2020 the Nifty tanked by 40% during the same period the FIIs sold INR ~54,000 crores. Whereas from May 2020 to Mar 2021 the Nifty gained 71% assisted by the FIIs buying of INR ~272,000 crores. The trend can be seen in the chart below.
In the latest months of July - August 2022 the FIIs announced their comeback and invested INR 54,157 crore.
The primary reason for them being net sellers was the rising interest rates. Therefore, their full-fledged return depends upon the reversing of rate hikes. It is expected for the interest rates to peak in the next year. The Fed has hiked its policy rate from 0.25% to 2.5%. In the month of July, inflation did witness some relief in the US and stood at 8.5% in July vs 9.1% year-over-year. Thus, in the anticipation of rates peaking in the next year, the FIIs could have possibly made a comeback in Indian markets. Which as we now know is a healthy sign of an upward trend.
The market has moved from pessimism to cautious optimism. With better expected corporate earnings going ahead, FII’s coming back and inflation peaking out in India, this optimism seems to be influenced less by noise and more by facts.
Technical Outlook:
Markets pulled back with decent gains of 1.68% this week after falling for three weeks in a row. This fall is considered a healthy correction in an intermediate-term up trend. The bulls got a much-needed breather after a sharp run-up from 15,200. Now that bulls have regained strength, they would try to take out 18,500 levels over the next few weeks. On an immediate term, 18,000 would act as a resistance followed by 18,500. On an immediate basis, support is placed around 17,500.
Expectations of the Week:
Globally, markets are expected to react to the much-anticipated inflation numbers of the USA. The inflation numbers of the USA released last month witnessed a drop and stood at 8.5% vs 9.2% YoY. Global markets will have their keen eye on this figure as it would influence the future course of rate hikes by the fed. Back home, a host of important events are slated to release. The Indian inflation numbers have been on a declining trend since April 22. Whether this continues or not will be avidly awaited. Further, the balance of trade payments and Export and Import figures would keep the market on its toes. Nifty50 closed the week at 17,833.35 up 1.68%.

Why Investors Must Evaluate Succession Plan of Companies Before Investing
Last week I touched upon the topic of the power of corporate management. The quality of management is the secret sauce of a company’s success. However, how is the management chosen?
We check for current management and how they run the business. But who will take forward the legacy? This question becomes of utmost importance when the key managers are close to retirement.
Recently, the market regulatory made succession plans compulsory. The pandemic claimed the lives of reputed businessmen last year. This left the firms in a vulnerable place.
The replacement appears to be more difficult, especially for the bigger companies. The competitive and volatile business environment has emphasized the role of top executives. Delayed replacement can indirectly cost the business dearly.
The chart below shows the options a founder has for his replacement.
Most Indian businesses are family-run. Usually, an entrepreneurial mind starts a business offering distinguished services. As the business grows the next generation operates the business modifying as per the new age requirement. The underlying problem here is whether the next-gen is interested enough to run the company.
Then there are companies where the business is run by professionals. HUL remains a classic example of a professionally run business. Bajaj Group is an instance of a well-operated family business handed down by generations.
Each type of change in management has its pros and cons. Professional management is ready to take more risks while family members become conservative to protect their family reputation.
On the other hand, internal family disputes are a common occurrence. Resultantly, the business ends up being divided. Amongst all this, the investors are the ones suffering due to the impact on the business. Professionals charge a huge amount as salary which often weighs down on the company’s profits.
An investor needs to be watchful if any key management personnel is close to retirement. If so, what is their succession plan? Do they expect to hire professionals to run the business or do they intend to hand it down to their trusted family members?
Technical Outlook:
Nifty50 index, started the week with a big gap down, taking negative cues from global indices, but recovered most of the losses and closed mild negative / unchanged. The benchmark index is now consolidating after posting a steep rally from 15,200 to 18,000 levels. The other global indices also seem to be following a similar structure, however, Indian markets are relatively outperforming. At the current juncture, the level of 17,150 is likely to act as a crucial support zone. As long as the said support remains protected we suggest traders maintain a bullish bias and follow buy on dips approach.
Expectations of the Week:
Given the lack of major domestic events, Indian markets’ sentiment will be influenced by its global counterparts to determine its movement. Across the globe, investors will be keeping a close watch on China’s Inflation numbers. The volatility in oil prices and USDINR will be other important factors that may affect the market. Investors need to watch out for stock-specific news. Nifty50 closed the week at 17,539.45, down 0.11%.