The Hindu Business Line : Banks relying on wholesale, short-term funds to take a hit

Mumbai, July 29 Banking stocks plunged on Tuesday as the RBI credit policy took the market completely by surprise with its higher-than-expected increase in the repo rate.

The BSE-Bankex fell by 8.31 per cent, while the benchmark index Sensex slid more than 550 points, falling 3.89 per cent from its previous close.

This rate hike would result in increased lending rates thereby lowering credit growth; for banks the cost of funds would increase, putting pressure on their net interest margins, said Mr Abhishek Agarwal, research analyst, Religare Securities Ltd.

Low cost deposits

While the increase in the interest rates is bound to hit the banking sector at large, analysts say that some banks will be less hit compared with others.

The banks which rely on wholesale funds and short term funds will be impacted more than the others, said Mr Vaibhav Agarwal, research analyst, Angel Broking Ltd.

The banks which are more dependent on low cost deposits will be comparatively less affected by the interest rate hikes.

Banks such as ICICI Bank are more vulnerable to interest rate hikes as a large part of its advances are in the real estate sector. So chances of defaults are likely to be more, given the current scenario in that sector, said Mr Alok Agarwala, Associate VP-Research, Justtrade.in, a Bajaj Capital Ltd venture.

According to analysts, big banks such as SBI, PNB and HDFC, which have a higher share of low cost deposits, are likely to be less hit.

On Tuesday, ICICI Bank fell by 8.45 per cent while it has been down by more than 8 per cent over the past week.

SBI was down by 6.84 per cent, PNB by 8.05 per cent, while HDFC was down 8.71 per cent.

Treasury income

The banks that have higher CASA (current account savings account) ratios will be less hit compared to other banks, as these are low cost deposits, Mr Gaurav Dua, Head of Research, Sharekhan Ltd, said.

The treasury side of the banks will also be hit badly. With interest rates going up, the value of bonds too will go down so the banks will have mark-to-market losses on account of that, he added.

“Banks having a high proportion of AFS (available for sale) in their portfolio would have to make higher provisions towards mark-to-market (MTM) losses. Union Bank of India, Allahabad Bank, Indian Bank would be the most impacted on this account”, Mr Abhishek Agarwal said.

Banks whose held to maturity (HTM) portfolio is higher will have lower MTM losses as the value of this portfolio does not vary with the rise or fall in interest rates, said analysts.

On Tuesday, Bank of India was down 12.57 per cent, Axis Bank down 11.06 per cent, Kotak Bank down 9.81 per cent, Bank of Baroda down 9.53 per cent, Indian Overseas Bank down 9.52 per cent, and Yes Bank down 6.14 per cent.

Bank of India and Yes Bank had seen their stocks go up substantially on the back of good quarterly results but after the interest rate hike following the credit policy a lot of investors exited these stocks, said analysts.

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