Bank stocks may see revival

BL Research Bureau | Updated on March 18, 2011


Having already factored in a 25 basis points (bps) hike in policy rates due to macro-economic headwinds, the BSE Bankex closed about 98 points, or 0.8 per cent lower on Thursday.

While Bank of India lost three per cent, SBI, ICICI , Axis and Canara Bank shed about 1-2 per cent from the previous close. Federal Bank and Kotak Mahindra bank, though, gained marginally.

In the one year since the reversal of the monetary policy stance on March 19, 2010, the BSE Bankex has seen its rise and fall. First, it zoomed 44 per cent form March 19, 2010 to a peak of about 15,000 during the November 2010 policy review, outperforming the Sensex gains of about 19 per cent during this period. By this time, the repo had increased by 150 bps and reverse repo by 200 bps since March 2010 to 6.25 and 5.25 per cent respectively.

Losing momentum

Ever since, tight liquidity conditions, worries about persistent inflation and further rate hikes, apart form broader market volatility has resulted in the Bankex losing momentum. At close on March 17, the Bankex has shed about 20 per cent since the November 5 peak, more than the Sensex loss of about 15 per cent for the same period. Besides, concerns about the increasing cost of funds and a peaking out of net interest margins, given the quantum of deposit rate hikes that has happened in the last few months, have also weighed down the stocks. For instance, SBI has lost about 33 per cent since the November peak.

However, Thursday's hike may provide a silver lining for investors in banking stocks. One, banks will now concentrate on repricing their assets as deposit rates at 9 –9.5 per cent have broadly reached a high. An easing in liquidity pressures also supports this argument. From an average borrowing of about Rs 93,000 crore under the LAF window during January this year, it has come down to an average of about Rs 68,000 crore in the first half of March. Moreover, lending rate hikes have lagged policy rate increases so far and base rates may play catch up. This is also because, aided by a continuation of RBI's anti-inflationary stance, another round of hikes is expected in the near term. That said, concerns on rate hikes affecting credit growth over the medium-term, would remain.

Published on March 17, 2011

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