Bank Stocks Outlook: Seen overcast next week on inflation woes

[B. Karthick]

Bank Stocks Outlook: Seen overcast next week on inflation woes

Banking counter is expected to remain overcast next week on
concerns of higher inflation and the possibility of further monetary
tightening measures by the Reserve Bank of India.
Banking shares will remain subdued in the next few days. But I
don't see
a major downside either, as lot of negatives have been factored in.
Rising inflation has eroded substantial value in banking shares, as
investors remained away from this sector on concerns of interest rate
and
cash reserve ratio hikes.
Investors' fears came true when RBI hiked the repo rate by 25 bps
to 8%
on Wednesday.
However, market participants feel that more stringent measures from
RBI
Could be in the offing as inflation inches closer to 9%.
Inflation for the week ended May 31 was 8.75%, up from 8.24% week
ago.
Many market participants now expect RBI to hike the CRR to further
curb
inflationary pressures.

IMPACT ON BANKS
As of now, apart from Jammu and Kashmir Bank, no bank has hiked its
prime
lending rate after the repo rate hike.
Jammu and Kashmir Bank yesterday hiked its prime lending rate by
100 bps to 14%.
However, major state-run banks including State Bank of India have
not yet
raised their lending rates.
Most of the banks are watching the SBI's move to take a decision
on
interest rates.
SBI officials met today but did not take any decision on hiking
interest
rates.
Banks have not hiked their prime lending rate despite the 75 bps
hike in
CRR in April and the recent 25 bps repo rate hike.
"Banks have been able to manage the pressure on liquidity,
interest
rates, net interest margin by better efficiency, changing product mix,
and reducing transaction costs," SBI Chairman O.P. Bhatt had said
Thursday.
However, clearly the cumulative impact of these rate tightening
moves
have taken a toll on banks' net interest margins.
Bankers admit that pressure on net interest margin is rising.
Investors are looking at banks' moves on interest rates. Raising
lending
rates would release some pressure off the margins, which may have some
positive impact on the stock.

VALUATION
Markets have corrected a lot.
It is a negative sentiment driven market now.
However, a slight positive news would help the banking stocks to
bounce
back because of attractive valuation.
ICICI Bank may lead the pack if there is any rise.

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

Jun 13 Jun 6 % change

Andhra Bank 66.70 71.25 -6.39
Bank of Baroda 231.90 228.40 1.53
Bank of India 268.40 263.05 2.03
Canara Bank 196.35 203.05 -3.30
Corporation Bank 315.85 319.35 -1.10
HDFC Bank 1,122.15 1,232.45 -8.95
ICICI Bank 765.30 769.40 -0.53
Oriental Bank of Commerce 155.05 160.25 -3.24
Kotak Mahindra Bank 613.70 638.40 -3.87
Punjab National Bank 436.35 448.85 -2.78
State Bank of India 1,335.20 1,335.20 0.00
Union Bank of India 125.25 124.50 0.60

Sensex 15,189.62 15,572.18 -2.46
Nifty 4517.1 4627.8 -2.39
CNX Bank Index 5993.15 6140.05 -2.39

End

B.Karthick,
Research Analyst.