Bank Stocks Outlook: Down next wk as more monetary tightening seen

[B. Karthick]

Bank Stocks Outlook: Down next wk as more monetary tightening seen
Saturday, Jul 5

Pressure on bank shares are not likely to ease next week as
overall
sentiments regarding inflation expectation are on the upside hence
further monetary tightening by the Reserve Bank of India is not ruled
out.
Bank shares are likely to fall despite gains in the broad market
as
political uncertainties are seen ebbing and oil prices softening.
There is nothing for the banks now (positive factor). Yields are
rising,
compelling the banks to raise interest rates, which will hamper their
business growth.
Yield on the most traded 10-year benchmark 8.24%, 2018 gilt has
risen 40 basis points this week and 106 bps since June on concerns
that rising
inflation will put pressure on RBI to tighten its monetary policy
further.
Inflation concerns remain high with finance ministry officials
indicating the rate could go up to 13% in the near term.
India's headline inflation scaled a new 13-year high to 11.63% for
the week ended Jun 21 from 11.42% in the previous week, according to
data released by the government yesterday, mainly because of rise in
prices of food products and manufacturing items.
This is the highest inflation rate since the new WPI series was
introduced in 1994 and the rate is more than double than Reserve Bank
of India's projection of 5.5% for FY09.
Last week, the country's central bank raised both repo rate and
banks' cash reserve ratio by 50 basis points each to 8.5% and 8.75% to
combat inflation.

MARGIN PRESSURE
With deposit rates climbing to 10%, margins of the banks will be
under pressure.
Private sector IndusInd Bank has launched a new scheme Thursday
offering 10% on 400-day deposits.
With inflation at the current level, the real return to the
depositor
has turned negative. Hence, banks have to offer more to at least to
match the increase in inflation.
As a result of increase in deposit rates, net interest margins of
the
banks will come under pressure.
Banks are already reeling under margin pressure since they are
unable to charge more to their corporate clients due to competitive
pressure.

CAPITAL CONSTRAINT
With the overall market conditions remaining volatile, some of the
banks have postponed their fund raising plans.
Karnataka Bank said indicated that rights issue of the bank may
have to wait till the market volatility eases as he said "we will
wait for an
opportune time."
The South-based bank will decide on timing of its issue at the
annual
general meeting on Jul 12.
Some public sector banks, like Syndicate Bank and UCO Bank are also
planning to infuse equity capital but are waiting for the market to
stabilise.

This week's closing prices of shares of leading banks, in rupees,
compared with a week ago, on National Stock Exchange:

Jul 4 Jun 27 % change

Andhra Bank 51.00 56.65 -9.97
Bank of Baroda 208.25 204.70 1.73
Bank of India 231.05 225.10 2.64
Canara Bank 167.60 178.45 -6.08
Corporation Bank 261.70 251.70 3.97
HDFC Bank 1000.30 1021.60 -2.08
ICICI Bank 603.60 652.15 -7.44
Oriental Bank of Commerce 127.75 131.25 -2.67
Kotak Mahindra Bank 450.95 490.60 -8.08
Punjab National Bank 388.45 402.05 -3.38
State Bank of India 1124.85 1161.20 -3.13
Union Bank of India 110.60 110.85 -0.23

Sensex 13454.00 13802.22 -2.52
Nifty 4016.00 4136.65 -2.92
CNX Bank Index 4990.90 5210.90 -4.22

End

B.Karthick,
Research Analyst.