This week most of the banking stocks hit their 52-week lows as the rupee fell and bond yields rose. Rising bond yields means lower bond prices, which has an impact on banks profitability.
Now, if Friday's sharp appreciation in the rupee is any indication then the rupee could appreciate and stabilise. On Friday, bonds registered their biggest weekly gains since 2009, according to a Reuters report which is certainly good news for banking stocks.
If the rupee stabilises, the RBI is likely to withdraw its recent liquidity tightening measures which had impacted banking stocks adversely. This means that banking stocks could stage a spectacular rally.
Now, fundamentally also banking stocks are valued attractively. Take the case of Yes Bank. The fourth largest private sector bank is barely trading at around 6 times its one-year forward earnings. The stock has plummeted from its 52-week high of Rs 547 three months ago, to the current levels of Rs 257 in just 3 months. For a bank that has its non performing assets well under control and is growing at 30 per cent annually, there's no reason why it should be quoting at such distressed levels.
PSU banks have been badly hit and are way below their book values and in most cases have a price to book value of less then 0.5 times. There are NPA concerns, but, once the economy starts reviving these are certainly going to improve.
It's possible that banking stocks may rally significantly from current levels, making them an excellent contra play.