Focus back on Banking Sector stocks?

Ask any analyst covering the banking sector and you will hear a common refrain: “Buy private sector banks – avoid public sector banks.” I endorse this view.

PSU banks are often forced by the government to extend services to sectors that private banks scrupulously avoid. They run up huge NPAs in the process.

A recent decision by the government to inject Rs 70,000 Crores over the next 4 years into PSU banks have switched the focus back on the banking sector.

Does that make PSU banks better buys? Have a look at the charts of 10 banking sector stocks below and make up your mind.

Punjab National Bank

PNB’s stock started a bull phase in Mar ‘14 that culminated with a closing high of 225.95 in Dec ‘14 (adjusted for 5:1 stock split marked by light blue bell).

As often happens after a stock split, sellers dominated and the stock has dropped into a bear market. The funds infusion news has seen buyers coming to the fore.

Technical indicators are looking bullish, so the stock can rally some more. A convincing move above the sliding 200 day EMA may shake off bears.

Bank of Maharashtra

The stock touched a 2 years closing high of 54.20 in Jun ‘14, but formed a ‘double-top’ reversal pattern and started a 9 months long down trend.

The stock has been consolidating sideways for the past 4 months, but is trading below its 200 day EMA in a bear market.

Daily technical indicators are looking bearish. A convincing move above 42 may change the trend to bullish.

Central Bank

This is the chart of a PSU bank that resembles that of private banks. It is clearly in a bull market.

After closing at a 2 years high of 114.60 in Feb ‘15, the stock price has been consolidating sideways with a slight downward bias.

Technical indicators are showing signs of turning bullish. This can be a good entry point.

Corporation Bank

The stock price closed at a 2 years high of 82.40 in Jun ‘14, but formed a ‘double top’ reversal pattern and started to correct. News of a 5:1 stock split took the stock to a lower top of 77.60 in Jan ‘15.

Bears reasserted themselves, and the stock has been sliding deeper into bear territory. Technical indicators are showing some upward momentum. Any rally should be used to sell.

Indian Overseas Bank

The chart structure of IOB stock is similar to that of Corp. Bank – minus the price spurt in Jan ‘15. After closing at a 2 years high of 88.80, the stock has been on a downhill ride with a break of 4 months (during Oct ‘14 to Jan ‘15) for a sideways consolidation.

Technical indicators are showing signs of upward momentum, but the stock should be avoided.

HDFC Bank

One look at the chart should convince any investor why HDFC Bank’s stock is a favourite of FIIs. After a brief bear phase during Aug-Sep ‘13, the stock price rallied strongly to close at 1094 in Jan ‘15.

A 3 months corrective phase followed. The stock dropped to seek support from its rising 200 day EMA, and then bounced up to touch a 2 years closing high of 1115.60 in Jul ‘15.

Daily technical indicators have corrected from overbought conditions. The stock looks set to resume its up move.

ICICI Bank

After closing at a 2 years low of 156.80 in Sep ‘13, the stock price rose almost one-way to a 2 years closing high of 383.85 (adjusted for the 5:1 stock split in Dec ‘14 marked by light blue bell).

The stock has been in a correction since then, but appears to have formed a ‘double bottom’ reversal pattern. Technical indicators are in the process of correcting oversold conditions.

The bear phase may have come to an end.

Axis Bank

From a 2 years closing low of 164.70 (touched in Sep ‘13), the stock rose to a 2 years closing high of 649.50 (in Mar ‘15 – adjusted for 5:1 stock split in Jul ‘14) – gaining almost 300% in 18 months.

The stock has been consolidating sideways within a ‘pennant’ pattern for the past 5 months, and is trading above its rising 200 day EMA in a bull market.

Technical indicators are in bearish zones, but trying to turn around. An upward break out from the ‘pennant’ is likely

IndusInd Bank

The stock has given very good returns to investors – rising from a 2 years closing low of 338 (in Aug ‘13) to a 2 years closing high of 977.60 (in Jul ‘15) and gaining almost 190% in 2 years.

In between, a 3 months corrective phase (during Apr-Jun ‘15) ended with a ‘double bottom’ reversal pattern that successfully tested support from the 200 day EMA.

Technical indicators are looking overbought and showing negative divergences. A correction may be around the corner.

Yes Bank

The stock of Yes Bank provided excellent returns to shareholders – gaining 290% from a 2 years closing low of 225.90 (in Aug ‘13) to a 2 years closing high of 883.35 (in Jan ‘15).

Squabbles within the promoter family has prevented the stock from going anywhere since then. The stock has consolidated within a ‘rectangle’ with a 100 points range for the past 6 months.

Technical indicators are showing some upward momentum. A likely upward break out from the ‘rectangle’ can help the stock price touch 4 figures.

Bank the dividends from PSU banks

There is bad news all around. High inflation, negative IIP number, sliding GDP, increasing fiscal deficit, scams and corruption. Anything that can go wrong seems to be going wrong in India.

Add to that the uncertainty caused by debt problems in the Eurozone, which is not helping exports. No wonder the stock market is in a tailspin with no bottom in sight.

Where can one invest without losing sleep? In this month’s guest post, Nishit suggests that tax-free dividend yields of PSU banks is a good place to park your investible surplus.

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The stock market is on a downward spiral. What should investors do? Where does one park one’s cash? The classic dilemma is between safety and preservation of capital and increasing wealth. There is an unexciting part of the stock market which is often unexplored since it is not very glamorous.

These are the PSU banks. They provide steady dividend yields in excess of 5%. Dividends are not taxable in the hands of investors. So, a dividend yield of 5% is equivalent to a return of 7.2% per annum on a bank Fixed Deposit (provided one falls in the highest tax bracket).

To prove this theory I have taken two case studies of Andhra Bank and Corporation Bank. Andhra Bank has declared a dividend of Rs 5.50 per share and it is currently trading at Rs 106. This gives a dividend yield of about 5.2%.

Now, people may argue whether such a dividend will continue in the future? The answer is ‘Yes’ because Andhra Bank has been a steady dividend payer. The dividend for last year also was Rs 5.50. Before that, it was Rs 5 and before that Rs 4.50.

If the stock price goes up and one finds that one has made enough profit, the stock could be sold. The stock had hit highs of Rs 189 and Rs 159 in the previous years.

The second stock is Corporation Bank. It has declared a dividend of Rs 20.50 per share (last year it declared a dividend of Rs 20). The stock trades around Rs 400, giving a dividend yield of 5.1%.

Now, if the stock price declines due to adverse market conditions, one can always add more. Andhra Bank had hit a low of Rs 77 last December giving a dividend yield of 7.14%. Almost similar was the case with Corporation Bank.

The Government is in need of money and keeps pushing the PSUs to pay liberal dividends. The downside to this strategy is if the bank does not declare dividends at all. For this one needs to keep a cursory glance at the Quarterly results and go in for mid-sized PSU banks. The dividend may decline at the most but it is unlikely to get stopped completely.

In times of uncertainty and with questions of where to park the money, this is a low risk strategy. One could always trade in and trade out of these stocks to reduce the cost of acquisition. In 2001, I had bought Andhra Bank shares for Rs 12 in the IPO. If I had held on to them all these years, the dividend yield would have been almost 50% every year for me now.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

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.

Chart Patterns of 10 Banking Sector stocks

The tightly regulated Indian banking sector has been one of the better performers during the bull rally. It forms one of the strong pillars that supports the India growth story. The competition and service standards of private sector banks have helped to improve the outlook of PSU banks towards customers from ‘doing a favour’ mode to ‘providing a service’ mode.

Still, there is plenty of room for improvement – both in customer service standards as well as in doing due diligence before handing out loans to corporates. The bribe-for-loans scam by some realty companies that was unearthed recently came as no big surprise to the Indian public. Many have run pillar to post to get a loan sanctioned before bowing to the malaise of greasing palms.

Many banks, particularly the ones linked with sanctioning loans to real estate and microfinance companies, have taken it on the chin during the ongoing correction in the Indian stock markets. Here are the one year bar chart patterns of 10 stocks from the banking sector – 5 of them from the PSU group and 5 from the private sector group. The ones that haven’t corrected a lot are the ones that are likely to lead the next rally in the banking sector.

Punjab National Bank

The second largest PSU bank had been in a bull market till it hit 1400 in Nov ‘10 and started to correct. A high volume fall to the 200 day EMA was followed by an upward bounce to the falling 20 day and 50 day EMAs. The stock has started falling again and is trading between the 100 day and 200 day EMAs. The technical indicators are looking weak. Another test, and a possible break, of the 200 day EMA is likely.

Bank of Baroda

This chart pattern looks the strongest of the PSU bunch. The stock is consolidating around the 100 day EMA. The technical indicators don’t hold out much bullish hope. A drop to the 200 day EMA may be on the cards.

Central Bank

The chart pattern of Central Bank remained in a sideways consolidation for 6 months, before breaking upwards on good volumes. It formed a bearish double-top after reaching the 250 mark and has corrected sharply. The stock had back-to-back closes below the 200 day EMA and has wiped out all the gains it made in the recent break out.

Corporation Bank

The stock had been in a bull market till it hit the peak of 814 in Nov ‘10. The subsequent correction seems to have ended with a sharp intra-day drop below the 200 day EMA, following which it managed to close above the long-term moving average and remains technically in a bull market. The technical indicators are hinting that the correction may not be over yet.

Indian Overseas Bank

The chart pattern traded in a range for seven months before breaking upwards on good volumes in Aug ‘10. After twice facing resistance from the 180 level, the stock is seeking support from its 200 day EMA. Any recovery may be short-lived and the stock is likely to correct some more.

HDFC Bank

This is a favourite stock of the FIIs, and the chart pattern shows why. The stock is in a bull market, and the recent correction looks more like a sideways consolidation. However, a test of support from the 200 day EMA seems imminent.

ICICI Bank

This stock is another FII favourite, but is more volatile than the HDFC Bank stock. Though the correction has been steeper, the stock hasn’t dropped to the 200 day EMA yet.

Axis Bank

The Axis Bank stock had an excellent bull run till it hit its peak in Oct ‘10. The correction has been just as strong, and the stock is struggling to move above its 200 day EMA.

Kotak Mahindra Bank

The Kotak Mahindra stock traded in a range of 85 points for 8 months. It finally broke upwards after the stock split and reached the 530 mark in Oct ‘10. The correction has not yet tested the support from the 200 day EMA, but may do so soon.

Yes Bank

FIIs hold majority stakes in Yes Bank, which had a spectacular run from a low of 41 in Mar ‘09 to a high of 388 in Nov ‘10 – gaining 850% in 20 months. The correction has been sharp, and the stock has closed three days in a row below its 200 day EMA. The correction may not be over yet.

Bottomline? All 10 banking sector stocks are undergoing correction. Bank of Baroda, ICICI Bank and Kotak Mahindra Bank have not suffered as much from the bear attack. The corrections may continue a little longer. Investors can wait a bit or buy in small lots.