Bank Stocks Outlook: Down next week as inflation seen worsening
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K.Karthik Raja
May 31, 2008, 1:22:23 AM5/31/08
to Kences1
Bank Stocks Outlook: Down next week as inflation seen worsening
It could be a summer of discontent for banks with stocks seen down
next week in the face of unabated inflation.
In the near term, tight policy is going to continue which is not a
good
news for the banking sector. In addition, the wait-and-watch policy
adopted
by the farmers to pay their dues as clarity on the farm loan waiver is
awaited has a negative sentiment on the banks.
The government has increased the farm loan waiver package to
716.80 bln
rupees from 600 bln rupees announced in the union budget.
India's headline inflation rate rose to a 44-month-high of 8.10%
in the
week ended May 17 from 7.82% a week earlier, according to data
released by
the government today. The higher inflation rate is on account of a
rise in
prices of primary articles.
Inflation can further worsen if the government goes ahead with an
oil
price hike. We expect inflation to remain high for the next 6-8 weeks.
With prices showing no signs cooling down, the Reserve Bank of
India is
expected to continue tight monetary policy stance, we said. Since Apr
2007, the RBI has hiked the cash reserve ratio by 225 bps to 8.25%.
This mean banks will not be able lower interest rates to spur
growth.
Credit growth has not picked up in the first quarter of the
current
financial year.
The borrowing limits for external commercial borrowing which has
been hiked,has also been viewed as negative because the corporate
sector will now borrow more from overseas market where rates are
lower.
The banks' worries were compounded as competition is not allowing
them
to cut deposit rates. Margins, especially of the state-run banks are
expected
to be remain under pressure.
To make matter worse, country's largest lender, State Bank of
India has
hiked the deposit rates this week.
"The move by SBI will force the banks to re-think which wanted to
cut
deposit rates".
Several heads of government-owned banks have conceded that their
net
interest margins are likely to be under pressure.
The only ray of hope in this scenario is that the valuations are
looking
attractive, we said.
"The valuations of all the banks are attractive and the long term
view is
positive. Our top picks are ICICI Bank, HDFC Bank and Axis Bank,".
This week's closing prices of shares of leading banks, in rupees,
compared with a week ago, on National Stock Exchange:
May 30 May 23 % change
Andhra Bank 75.85 79.85 -5.01
Bank of Baroda 272.35 285.25 -4.52
Bank of India 294.85 325.30 -9.36
Canara Bank 214.95 225.10 -4.51
Corporation Bank 342.45 344.25 -0.52
HDFC Bank 1368.70 1381.50 -0.93
ICICI Bank 788.60 862.05 -8.52
Oriental Bank of Commerce 171.80 202.00 -14.95
Kotak Mahindra Bank 692.95 700.85 -1.13
Punjab National Bank 487.05 514.15 -5.27
State Bank of India 1445.00 1573.30 -8.15
Union Bank of India 137.35 146.85 -6.47
Sensex 16415.57 16649.64 -1.41
Nifty 4870.10 4946.55 -1.55
CNX Bank Index 6584.35 7009.05 -6.06
K.Karthik Raja
Research Analyst
It could be a summer of discontent for banks with stocks seen down
next week in the face of unabated inflation.
In the near term, tight policy is going to continue which is not a
good
news for the banking sector. In addition, the wait-and-watch policy
adopted
by the farmers to pay their dues as clarity on the farm loan waiver is
awaited has a negative sentiment on the banks.
The government has increased the farm loan waiver package to
716.80 bln
rupees from 600 bln rupees announced in the union budget.
India's headline inflation rate rose to a 44-month-high of 8.10%
in the
week ended May 17 from 7.82% a week earlier, according to data
released by
the government today. The higher inflation rate is on account of a
rise in
prices of primary articles.
Inflation can further worsen if the government goes ahead with an
oil
price hike. We expect inflation to remain high for the next 6-8 weeks.
With prices showing no signs cooling down, the Reserve Bank of
India is
expected to continue tight monetary policy stance, we said. Since Apr
2007, the RBI has hiked the cash reserve ratio by 225 bps to 8.25%.
This mean banks will not be able lower interest rates to spur
growth.
Credit growth has not picked up in the first quarter of the
current
financial year.
The borrowing limits for external commercial borrowing which has
been hiked,has also been viewed as negative because the corporate
sector will now borrow more from overseas market where rates are
lower.
The banks' worries were compounded as competition is not allowing
them
to cut deposit rates. Margins, especially of the state-run banks are
expected
to be remain under pressure.
To make matter worse, country's largest lender, State Bank of
India has
hiked the deposit rates this week.
"The move by SBI will force the banks to re-think which wanted to
cut
deposit rates".
Several heads of government-owned banks have conceded that their
net
interest margins are likely to be under pressure.
The only ray of hope in this scenario is that the valuations are
looking
attractive, we said.
"The valuations of all the banks are attractive and the long term
view is
positive. Our top picks are ICICI Bank, HDFC Bank and Axis Bank,".
This week's closing prices of shares of leading banks, in rupees,
compared with a week ago, on National Stock Exchange:
May 30 May 23 % change
Andhra Bank 75.85 79.85 -5.01
Bank of Baroda 272.35 285.25 -4.52
Bank of India 294.85 325.30 -9.36
Canara Bank 214.95 225.10 -4.51
Corporation Bank 342.45 344.25 -0.52
HDFC Bank 1368.70 1381.50 -0.93
ICICI Bank 788.60 862.05 -8.52
Oriental Bank of Commerce 171.80 202.00 -14.95
Kotak Mahindra Bank 692.95 700.85 -1.13
Punjab National Bank 487.05 514.15 -5.27
State Bank of India 1445.00 1573.30 -8.15
Union Bank of India 137.35 146.85 -6.47
Sensex 16415.57 16649.64 -1.41
Nifty 4870.10 4946.55 -1.55
CNX Bank Index 6584.35 7009.05 -6.06
K.Karthik Raja
Research Analyst
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