Hedging against volatility in Indian bank stocks suddenly looks cheap

The cost of hedging against volatility on the NSE Nifty bank index is nearing its lowest since January compared with the broader NSE Nifty 50 index, indicating a decline in demand for protection.

Meanwhile, bearish options outstanding on the bank benchmark fell to a three-week low against bullish contracts on Friday, according to data compiled by Bloomberg.

ETMarkets.com

Indian banking stocks have lagged the broader market, with weak deposit growth raising concerns of further regulatory tightening. Firms such as Morgan Stanley remain bearish, but Jefferies Financial Group said valuations already reflect the concerns and a possible liquidity easing could help cushion the impact if interest rates fall. Demand for retail loans remains robust, with lenders such as HDFC Bank, Kotak Mahindra Bank and ICICI Bank beating analysts’ profit expectations in the fourth quarter. “Trader appetite has clearly shifted to private banks and that’s the best place to put fresh capital,” said Tejas Shah, head of derivatives trading at Equirus Securities. “Private banks are well positioned to outperform.”

While the Nifty 50 index has risen 15% this year, hitting a record high earlier this month, the bank index has risen only about 6%. The bank index is currently trading at 2.3 times book value, slightly below its three-year average and lower than the Nifty 50, according to data compiled by Bloomberg. The bank index’s three-month implied volatility versus the benchmark index has recovered slightly from its Sept. 5 low, but the spread remains more than a fifth below its one-year average.

Vaishali Parekh, vice president of technical research at Prabhudas Lilladher, wrote in a Sept. 10 note that if the bank index “decisively” rises above the 51,800 zone (Tuesday’s close was 1% below this level), the index could rise and retest its intraday high of around 53,300.

“In the near term, we expect banks to outperform given our defensive stance against the market,” Jefferies analysts including Mahesh Nandurkar wrote in a note dated Sept. 9. They further added that ICICI Bank, Axis Bank and State Bank of India are top picks.