The Hindu Business Line : The long-term outlook for bank stocks

Despite concerns about tight liquidity at present, credit growth for Indian banks is likely to remain quite strong over the next few years, helped by corporate demand for credit. To cite an example, infrastructure spending in the Eleventh Plan period, to be financed mainly through bank loans and ECBs, is about Rs 9,96,000 crore. And infrastructure is just one of the many sectors starved for funds.

In the near term, the easing measures taken by the RBI in the form of cuts in the cash reserve ratio and statutory lending ratio, will release bank funds to the tune of Rs 1,80,000 crore, allowing room for expanding the loan book.

The sharp cut in repo rate also sets the signal for lower interest rates, which are bound to stimulate credit growth. What does the prospect of declining interest rates signal for bank performance? Banks have already been responding to the repo rate cut with reductions in their PLRs (75 basis points) and deposit rates (50 basis points).

Lower rates, apart from helping demand for credit, may also reduce risks of slippages in asset quality, a key concern for many months. However, lower interest rates also create several near-term challenges for banks. Deposit rates may not be as flexible as PLRs, and may remain relatively high, putting pressure on costs. The recent PLR and deposit rate changes suggest pressure on NIMs, which may fall back to the June quarter levels.

Boost from reforms

However, the sharp markdown in bank stock valuations suggests that this may be a good time to accumulate selectively. Our preferred exposures at this juncture are: HDFC Bank, Axis Bank, Yes Bank, Bank of India, State Bank of India and PNB.

RBI has earlier indicated that it may consider the entry of foreign banks after April, 2009. Though their entry might be uncertain, consolidation of the Indian banks is expected to happen in coming years to weather competition. SBI (State Bank of Saurashtra is already merged with SBI) is leading the pack as the merger with its associated banks is expected in coming years which will give it around a share of almost a quarter of total advances. HDFC Bank’s merger with CBoP this fiscal made it the seventh largest bank and the largest networked private bank.

The financial sector reforms in near future will also help in boosting the banking stocks.

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