Bank Stocks Outlook: Under pressure next week on CRR hike fears

[Sukumar]

Bank Stocks Outlook: Under pressure next week on CRR hike fears
Friday, Apr 4

MUMBAI - Banks stocks are likely to be under pressure next week as
the market fears a hike in the cash reserve ratio - a measure that
could be taken by the Reserve Bank of India to check inflation.

India's headline inflation hit three-year high at 7% for the week
ended Mar 22 from 6.68% a week ago, according to the data released by
the ministry of commerce and industry today. The RBI target rate of
inflation is 4.5-5% for the medium term.

The rise in inflation rate is mainly on account of prices of
primary
articles, mainly iron ore.

Bank stocks are likely to underperform mainly on account of high
headline inflation. Fiscal and monetary measures may be taken by the
government and RBI to check rising prices.

The high inflation figures and the likely CRR hike would delay the
softening of the interest rate thus putting pressures on banks'
profitability.

In the last couple of years, RBI has hiked CRR several times. At
present,tt stands at 7.5%.

Since the RBI has not hiked CRR in the third quarter review of its
annual policy, banks took the signal positively and lowered their
lending
rates to boost credit growth. The situation may reverse now.

However, from an economic point of view the current inflation
level is
because of supply side constraints, and monetary measures to bring
down credit off take may not be the right recipe.

Although we cannot rule out any possibility, RBI may not hike CRR
as the regulator should not be uncomfortable with 18-20% credit
growth.

Angel has maintained buy on Yes Bank with a 12-month target price
of 238 rupees compared with current market price of 147.50 rupees.
HDFC Bank and Axis Bank are the top picks of Angel Broking.

Market sentiment can worsen going ahead, as inflation figures are
expected to remain high in the short to medium term, as supply side
constraints are likely to sustain.

Close on the heels of general elections, the government is likely
to takeall measures to rein in inflation.

The RBI governor's statement that the government and RBI will take
appropriate measures necessary to reduce inflationary pressures, inour
view,reflects the increased risk of tightening in monetary policy and
aggressive sector-specific policy measures.

It sees inflation pressures as a drag on near-term market
performance.

Also, the decline in capital market volumes and the increase in
yield of government papers may hit banks' fee-based income and
treasury gains.
.
Today's closing prices of shares of leading banks in rupees,
compared with a week ago, on National Stock Exchange:
.
Apr 4 Mar 28
% change
.
Andhra Bank 74.30 76.85
-3.32
Bank of Baroda 269.05 302.75 -11.13
Bank of India 275.25 273.25
0.73
Canara Bank 217.05 226.95 -4.36
Corporation Bank 295.10 287.60 2.61
HDFC Bank 1,293.85 1,407.00 -8.04
ICICI Bank 764.55 835.50
-8.49
Oriental Bank of Commerce 166.60 185.80 -10.33
Kotak Mahindra Bank 614.55 673.50 -8.75
Punjab National Bank 491.40 530.30 -7.34
State Bank of India 1,601.70 1,677.80 -4.54
Union Bank of India 137.55 146.60 -6.17
.
Sensex 15,343.12 16,371.29 -6.28
Nifty 4,647.00 4,942.00 -5.97
CNX Bank Index 6,545.15 8,200.00 -20.18

N.Sukumar
Research Analyst
www.kences1.blogspot.com