Bank stocks under heavy selling pressure

The liquidity tightening measures announced late on Monday by the Reserve Bank of India (RBI) made investors sell banking shares in large quantities with the BSE Bankex shedding nearly 5% or 651 points.

Written by Fe Bureau | Mumbai | Published: July 17, 2013 3:54 am

The liquidity tightening measures announced late on Monday by the Reserve Bank of India (RBI) made investors sell banking shares in large quantities with the BSE Bankex shedding nearly 5% or 651 points. All banking majors ended the day deep in the red on concerns that the latest measures would hit lending margins of banks.

The country’s largest lender,State Bank of India (SBI),touched a 52-week-low of R1,798 during intra-day trading. The stock plunged more than 4% to close at R1,828. Yes Bank’s nearly 10% slip was the biggest fall by a banking stock on a day when the market gauge Sensex lost about 1% as the fear of a rise in borrowing rates hit market sentiment. Yes Bank share closed at R451.55,down R48.95.

Among public sector banks,the losing pack included Canara Bank (-8.64%),PNB (-5.58%),Bank of India

(-4.77%) and Bank of Baroda (-4.35%),while private sector losers included Indusind Bank (-7.97%),Federal Bank (-3.53%),Kotak Mahindra Bank (-5.99%),Axis Bank (-5.95%),ICICI Bank (-5.61%) and HDFC Bank (-2.37%).

Brokerages on Tuesday downgraded their outlook on the financial sector and were of the view that banks that rely on wholesale funding would be most affected by central bank’s move to tighten liquidity and raise the marginal standing facility (MSF) rate and bank rate by 200 bps each.

Credit Suisse,in a note on Tuesday,stated that wholesale-funded entities like Yes Bank,Kotak Mahindra Bank,Bank of India (BOI) and Canara Bank; banks with high loan-to-deposit ratio like Indusind and Yes Bank; and banks with asset-liability mismanagement will be impacted the most. Morgan Stanley revised its view on the financial sector to ‘cautious’ from ‘in line’. The brokerage stated,“Our in-line view on the sector was premised on stabilising growth and rates. Both are at risk now.” It listed SBI,PNB and Axis Bank as Top India ‘avoids’. Bank of America Merrill Lynch observed that Indian banks remain in a cautious mode,with asset quality likely to continue deteriorating well into FY14. The brokerage pointed out that going ahead the threat of a sovereign downgrade by S&P,which could,in turn,lead to a downgrade of Indian banks to non-investment grade,remains a key overhang.

Market observers also feel that RBI’s move will hurt the margins of the banks. “Apart from hurting margins through higher borrowing cost,it may impact credit growth and asset quality. Increase in yields of long-dated government securities could spell treasury losses for some banks. In our view,wholesale-funded banks and NBFCs would be more adversely impacted as they may witness higher margin contraction,” said Amar Ambani,head (research),India Infoline.

Experts further add that poor asset quality and an increase in provisioning may further add to the woes of the banking sector. “The provisioning is expected to increase in the next 2-3 years. So,we anticipate the earnings numbers from banks to be muted. Private sector banks,however,would be better off in comparison,” said Pankaj Pandey,head (research),ICICI Securities.

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