There has been a lot of debate going on regarding banking stocks lately. The discussion says that Banking stocks might face further pressure if markets go down from here due to high interest rates and thus the sector as a whole should be avoided. When the Nifty was close to 5000 levels, private banking stocks were trading around 15% or so higher from current levels however the recent dip to 4800 in the nifty has been lead by Banking and IT. Now that stocks have crashed 15% or so very fast, a lot of bearish views have come in. The issues like interest rates have been for quite some time now, so why were the private banks holding up firm till Nifty crashed below 5000?

A long time ago I had said that markets falling below 5200 is unlikely till we see a crash in the private banking stocks and with them holding up firm, its unlikely to see lower levels. To our surprise private banks delivered firm in Q1 FY12 results and even after that the stocks crashed. The point actually which is not addressed is, this fall in our markets was lead by global factors and with most sectors already beaten out and private banks holding firm, it was likely that if markets fall to such low levels, banking stocks wont be spared. One just have to come up with a view that there will be pressure in earnings in future due to high interest rates and that expectation and thinking is enough to take down the stocks 10-15%. Markets have to fall due to global factors, so where to sell? Book profits in banks and once they start weakening below technical support zones, people start shorting and soon after some crash all sorts of bearish tones start coming over. Till the banks were holding firm before nifty crashed below 5000, people were positive and were buying private banks and now they’re selling.

On the side note, now that stocks have indeed corrected, I feel this is a good time to start further accumulating the private banks. Banking in India will grow, we are not going to face any kind of problems as banks on the west are facing. Our private banks are strong and firm and will deliver a good growth for a long time to come. Indian Banking is very different from the west as we have limited banks and a lot of areas are yet to be explored. A bank with a good management will definitely deliver returns to the share holders.

The strategy I’m asking to apply from current levels is, pick a private banking stock that is posting good results and will do so in future and is also looking under valued and start accumulating it from current levels. Make sure to use every significant decline in the stock to accumulate more and only that way you can get a good buying price. I cannot rule out a 10% or more correction in the stocks but that is just a guess, not a definite conclusion. Nobody knows where the markets are heading and taking a definite call is impossible. So thus in this free falling market, a good strategy is to take a buy on decline approach and have a good average buying price and stay put for 2 years, Im sure you will make enough money. I am extremely positive on the private banking space from a long term view and the biggest advantage today is, they have corrected a lot and is looking pretty decent valued.

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