Can Banking Laggards Propel The Market Further?

The Indian markets ended Thursday's trade along expected lines, with the Sensex and Nifty 0.5 percent higher than the previous close. The market breadth wasn't as strong as the close might suggest, with the number of declining stocks on the Nifty 50 as well as all the active BSE stocks being higher than the advances. The large-cap indices have ICICI Bank to thank for this close. The nearly 10 percent short-covering-led move in the stock, and the rub-off effect on other banking stocks like Axis Bank, State Bank of India,and Bank of Baroda led to the Bank Nifty moving up 1.85 percent.

The move is not surprising. ICICI Bank has been one the worst performing banking stocks. Before Thursday's rally, ICICI Bank has risen slightly less than 7 percent year-to-date. If the bank can continue with this performance in the coming quarters, there is reason to believe that there may be enough headroom left, simply because it has underperformed peers in a big way. At current prices, ICICI Bank trades at 1.7 times one-year forward book value as per Bloomberg estimates. The average of the last five years for the price-to-book one year forward stands at 1.83 times, implying a price of Rs 310 per share.

If the stock was to scale back to its peak valuation of 2.6 times one year forward price-to-book, it would mean a price of Rs 447 per share.

Also Read: Hang On, ICICI, The Plumber's Coming: Gadfly

The question here is whether public sector banks can emulate what ICICI Bank has done, both in terms of quarterly performance and price performance. If PSU banks can surprise on their Q4 results, then we can expect a good move for the Bank Nifty and as a result, on the Sensex and the Nifty as well. This market has been showing some serious resilience, and if we now see the weaker hands starting to contribute, then the party may well continue.

Niraj Shah is Markets Editor at BloombergQuint.