Chart Patterns of 10 Banking Sector stocks (an update)

There is nothing like a nice, long bear market to separate the men from the boys. Banking sector stocks have been no exception. Back in Dec ‘10, banking sector stocks were undergoing corrections after touching new highs. Those corrections turned out to be the first phase of a 14 months long bear market.

There are two schools of thought in the stock market. One group believes that stocks that have undergone deeper corrections during a bear market, are likely to gain more during the subsequent bull rally. There may be some truth to this line of thought – if gains are measured in percentage terms from the lows.

The other group prefers stocks that fall less during a bear phase, but recover more quickly in the subsequent bull phase – even though the gains may not be high in percentage terms. If you are not sure which group you should follow, have a look at the charts of ten banking sector stocks below to help you to decide.

Punjab National Bank

Punjab National Bank’s stock was one of the star performers during the bull phase from Mar ‘09 to Nov ‘10. The bear market shaved 46% off its peak level of 1395. The recent bull rally from its Dec ‘11 low of 751 pierced the 200 day EMA from below and reached 1091 – a 45% gain from the low. But the stock price remains in a bearish pattern of lower tops and lower bottoms and has slipped down below its 200 day EMA. Technically, the stock is in a bear market. Avoid.

Bank of Baroda

Bank of Baroda’s stock dropped from a peak of 1050 in Nov ‘10 to a low of 630 in Dec ‘11 – a 40% fall. The recent rally topped out at 881 – a gain of 40% from its low. The stock is trading above its 200 day EMA, but is still in a bearish pattern of lower tops and lower bottoms. Hold.

Central Bank

Central Bank’s stock made a double-top at 249 during Oct-Nov ‘10 and fell steadily down to touch a low of 63 in Jan ‘12 – a 75% fall from its peak. Though the recent rally gave a 76% gain from its low to its intermediate top of 111, the stock is trading below its 200 day EMA and remains deep inside a bear market. Avoid.

Corporation Bank

The stock price of Corporation Bank fell 59% from its top of 815 to its bottom of 335. The subsequent rally gained 57%. The stock is struggling to stay above its 200 day EMA, and remains in a down trend. Note the sharp volume spike as it crossed above its 200 day EMA – an indication that it may not fall much further. Hold.

Indian Overseas Bank

Indian Overseas Bank’s stock dropped 58% from its peak of 176 to a low of 73. Though the stock price rose sharply above its 200 day EMA – gaining 73% from its low – it has dropped equally fast and remains in a bear market. Avoid.

HDFC Bank

A favourite of the FIIs for obvious reasons, HDFC Bank’s stock has risen steadily to touch a new high in Feb ‘12 – forming a bullish pattern of higher tops and higher bottoms. Despite several drops below its long-term moving average, the stock is in a bull market. If you think that HDFC Bank’s stock is too expensive, and it is better to go for ‘cheap’ stocks like Central Bank of Indian Overseas Bank – think again. Cheap can get cheaper. Buy.

ICICI Bank

The stock price of ICICI Bank lost almost 50% from its peak of 1277 in Nov ‘10. The recent rally produced a 55% gain from its Dec ‘11 low of 641. The stock is in a clear down trend and struggling to get out of its bear market. Hold.

Axis Bank

Axis Bank’s stock touched a high of 1608 in Oct ‘10 and a trough of 784 in Jan ‘12 – a 51% loss. The sharp rally to 1309 means a 67% gain. But the stock price is in a long-term down trend and struggling to get out of a strong bear grip. Hold.

Kotak Mahindra Bank

The stock price of Kotak Mahindra Bank is in a bull market and touched a new high in Feb ‘12. The subsequent correction is receiving good support from its 20 day EMA. Buy.

Yes Bank

Yes Bank’s stock made a double-bottom (in Feb ‘11 and Jan ‘12) reversal pattern and re-entered a bull market. The stock is consolidating, and should test and break above its Nov ‘10 top of 388. Buy.

Market celebrates RBI interest rate hike – why?

RBI increased the repo rate (at which it provides short-duration loans to banks) and the reverse repo rate (at which banks maintain short-duration deposits with the RBI) by 25 basis points each. The repo rate is now 8.5% and the reverse repo rate is now 7.5%. The CRR has been left unchanged at 6%.

With inflation remaining stubbornly high despite 12 rounds of rate increases since Mar 2010, it was widely expected that the RBI will increase the repo and reverse repo rates by 25 bps (0.25%) today. The market should have already discounted the rate hike. Why the buying celebration then? Was there some good news that the market liked?

Apparently, there were three. First, and most important, the RBI governor hinted at inflation rate moderating to 7% by Dec ‘11, in which case there will be no further rate hike at the end of the year. Moderation of inflation and a likely pause in the rate hike cycle was considered ‘good news’ by the market.

Also, for the first time ever, interest rate on savings bank accounts have been de-regulated. That means banks have the freedom to offer any interest rate on savings bank accounts that they deem fit. Last, but not the least, banks have been given the freedom to open branches in Tier-II through Tier-VI towns without prior permission.

Let us look a little more critically at each of these pieces of ‘good news’.

How will inflation suddenly moderate to 7% in less than 2 months when it has remained uncontrollably high for the past 20 months? Will food prices suddenly fall? Will government employees get less salary? Will politicians become honest and stop their looting? The answer is: none of the above.

The moderation will happen due to the ‘base effect’. Inflation was already high in Dec ‘10. So the YoY increase in Dec ‘11 will appear to be less. Actual prices that we pay will remain almost the same as now. There is also a possibility that diesel and kerosene prices will finally be increased if inflation does moderate. So, we may get back to square one.

What about the pause in the rate hike? Well, that won’t help much either. Better than bad isn’t necessarily good. As per RBI’s guidance, the GDP growth rate has been revised down from 8% to 7.6% in year ending Mar 2012. There are already signs of growth slowdown, which will be exacerbated by today’s rate hike. Unless interest rates start heading downwards, stock markets are unlikely to go up.

Is the saving bank interest rate de-regulation good news? Certainly not for banks. Their business has already been hampered by high interest rates – due to which loans have become dearer and term deposit rates have gone up. If interest rate on savings bank accounts is increased, it will be a direct hit on bank bottom lines.

As per the Economic Times, if savings bank interest rate is increased from the current 4% to 5%, then all the banks put together may need to pay out an additional interest of Rs 15,000 Crores, which may reduce the entire banking sector’s profitability by 13%.

Look at it another way. Savings bank account holders will collectively receive an extra Rs 15,000 Crores. What will they do with the sudden inflow? Why, spend most of it. Will that stoke the fires of inflation or not? You tell me!

SBI has the largest percentage of savings bank accounts among all banks (Yes Bank has the fewest) and will be affected the most by an increase in savings bank interest rate. The CMD went on record that SBI will not increase the savings bank interest rate. He also said that de-regulation means rates can also be reduced.

What about opening branches in small towns? It may help in financial inclusion of people living in remote areas where no bank branches exist. But if there was a lot of business potential in Tier-II through Tier-VI towns, banks would have sought permission to open branches there by now. By removing the red-tape of prior permission, the business potential of remote corners of the country is not going to increase overnight. But opening branches will add to the operating costs of banks.

The ‘good news’ doesn’t seem so good, does it? What was the reason for the buying today? It was a combination of short-covering and index management – today being early F&O ‘expiry day’ because of the Diwali holiday. The broader markets didn’t participate much in the rally.

Both the Nifty and the Sensex are poised at the upper end of their respective trading ranges of the past 11 weeks – with the huge gaps caused in Aug ‘11 remaining unfilled. Tread with caution.