The Hindu Business Line : CRR move weakens banking stocks

THE reduction in interest rate on CRR balances by RBI from 6 per cent to 3.5 per cent will leave banks across-the-board poorer by Rs 2,000 crore. "The extent of loss, across the banks, will be proportionally equal irrespective of the size of the bank. Bond yields will be higher which in turn will lead to treasury loss," a senior analyst tracking the sector said.

Brokers said the concern was reflected in the knee-jerk reaction one witnessed amongst the PSU bank stocks as trading commenced on Monday. In fact, the sector appeared to be the only underperformer in an otherwise positive scenario. Even as this would seem to indicate a perceptible slowdown in the revival of interest in the banking sector, brokers look on it as a good time to buy.

"In the long term they will gain on margins from other areas which will cushion them from any long term adverse impact," a market source said.

The question that is doing the rounds of the market is whether this is a clear indication that interest rates will be kept firm? While a large section of the analysts believe that a firming up of interest rates is but a precursor to the latest move by RBI, there is a view anything beyond 6.5 per cent could see people borrow less. "This in turn would bring about a slowdown in capital formation, import-export will take a hit etc. However, seeing the base and robustness of banks, our view on the sector continues to be bullish," said a senior analyst with a reputed domestic brokerage.

Says Mr Dilip Bhat, Director and Head of Research with Prabhudas Liladher, that the move will not only dampen inflation but will also serve to `cool down' select sectors such as the commodity sector, which has been witness to certain untoward rise in prices. "Though overall profitability of the banks will be impacted, there is no doubt it will also encourage commercial lending. However, going forward one can expect interest rates to firm up. This move is but a precursor," he added.

PSU banks that were impacted adversely today on the stock market included Allahabad Bank, PNB, Syndicate Bank and SBI. Among the private sector, Bank of Punjab, J&K Bank and ING Vysya fell.

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