The Hindu Business Line : Negative news from all sides weakens banking stocks

Chennai/Mumbai, June 2 The banking space has been the worst affected in the last 10 days, as investors, particularly institutions, turned away from these counters. While the Sensex witnessed a fall of 1.75 per cent in a week’s time, the Bankex tumbled by 6.11 per cent. As against a Sensex’s fall of 8.73 per cent over a month, the Bankex declined by a whopping 18.46 per cent.

In fact, the BSE Bankex, which touched its peak of 12,678.98 on January 14, crashed by a massive 41 per cent.

Public sector banks were the worst affected among the banking space. Today’s fall in the banking stocks was attributed to poor sentiment on the sector in European markets while local inflationary concerns raised fears of further monetary tightening.

According to brokers, fears of an imminent interest rate hike by the central bank as inflation continues to rise to record highs seemed to have affected the sentiment for the stock.

Besides, news of sterling hitting a one-week low versus the dollar on Monday after UK bank Bradford & Bingley announced a slump in profits, fuelling fresh concerns about the banking sector further aided the downfall of these sector.

The banking sector, according to market participants, has been receiving negative news from all corners. First, the inflation figure, which has been climbing steadfastly in recent weeks, has now crossed the 8 per-cent mark. Then, the Finance Minister enhanced the farm loan waiver to Rs 72,000 crore from Rs 60,000, which was announced during the Budget. Then the nation’s premier bank, SBI hiked deposit rates by 25-50 basis points for long-term deposits. According to analysts, this could put pressure on its operating profit margin in the short-term.

According to Mr Vaibhav Agarwal, banking analyst with Angel Broking, the negative for the banking sector is the tight policy stance which could prevail for some time given rising inflation. “Chances of the interest rates softening seem unlikely, at least for some time, due to the inflation, which is inching up,” he said.

pressure on margins

The banking sector could also face pressure on margins if they hike deposit rates, like the State Bank of India has just done, Mr Agarwal said.

In the short-term, six months to one year, the banking sector, especially the nationalised banks, could see the NPAs in the farm sector going up, due to the farm loans waiver scheme, he added.

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