Bank Stocks Outlook: Seen up next week despite lending rate cut

[K.Karthik Raja]

Bank Stocks Outlook: Seen up next week despite lending rate cut

Shares of banks are seen in positive territory next week,
despite a lot of banks deciding to cut their lending rates. A cut in
lending rates is seen as negative for banks as it has a bearing on
their interest income.
However, banks' decisions to cut lending rates were triggered by
decline in the cost of deposits in the current quarter. In the fourth
quarter of the previous financial year, all the banks took high-cost
deposits of one-year tenure. As banks are not renewing those
deposits (or renewing at lower interest rates), there is a cost relief
on
that front, which has partly prompted the banks to cut lending rates.
State Bank of India, the country's largest lender, has reduced its
benchmark prime lending rate by 25 bps to 12.5% on Monday, which
prompted a series of banks, including private sector Axis Bank, to cut
lending rates.
The other factor that has led the banks to cut rates was Reserve
Bank of India's decision to keep key policy rates unchanged at the
third quarter review of its monetary and credit policy for
2007-08 (Apr-Mar) on Jan 29.
Status quo signal by RBI has been viewed by the banks that RBI
will not increase key rates further, if not bring it down.
However, such a prompt reaction by the banks to cut rates has also
surprised market players because rate cuts generally do not take place
in the last quarter of a financial year, which is a "busy season."
"The timing of the rate cut by SBI is interesting, which is just a
day
before the meeting with Finance Minister P. Chidambaram who was in
favour of a softer interest rate. Since SBI has triggered the cut,
other smaller banks have no choice but to follow suit.
The cut in lending rates are also seen as an effort to increase
the
business volume before the financial year-end.
Margins, however, are expected to come under pressure because of
lending rate cuts
We have seen volatility in bank share prices in the last couple of
weeks. The fundamentals, however, continue to be good. The cut in
lending rates may put margins under pressure as deposit rates are
expected to come down with a lag. The banks with higher low-cost
deposit share will do well.

TOP PICKS
Recommendation on private sector
bank stocks like ICICI Bank, Axis Bank and Yes Bank, and Corporation
Bank and Indian Overseas Bank among state-run banks.
Recommendation to Indian Overseas Bank in its latest report,
setting a target price of 215 rupees over a one-year period. Shares of
Indian Overseas Bank closed at 176.10 rupees today on National Stock
Exchange, down 0.42% from Thursday.
Under the current set of assumptions, we expect the bank to
achieve net profit CAGR (Compounded Annual Growth Rate) of 12.5%
during FY08-10. We project a decline in RoA (Return on Assets) to
1.23% in FY09 due to pressure on the margins and high LLP (loan loss
provisioning). This would lead to RoE (Return on Equity) contracting
from 29.1% in FY07 to 24.75% by FY09.

Today's closing prices of shares of leading banks in rupees,
compared with a week ago, on National Stock Exchange:
.
Feb 15 Feb 8 %
change
.
Andhra Bank 90.65 89.40 1.40
Bank of Baroda 412.00 385.40 6.90
Bank of India 376.45 353.90 6.37
Canara Bank 304.65 294.60 3.41
Corporation Bank 338.90 329.95 2.71
HDFC Bank 1,562.25 1,441.95 8.34
ICICI Bank 1,190.90 1073.90 10.89
Oriental Bank of Commerce 273.50 278.40 -1.76
Kotak Mahindra Bank 900.80 858.40 4.94
Punjab National Bank 621.10 634.30 -2.08
State Bank of India 2,295.65 2,192.10 4.72
Union Bank of India 199.55 191.55 4.18
Sensex 18115.25 17464.89 3.72
Nifty 5302.90 5317.25 -0.27
CNX Bank Index 9380.05 9752.25 -3.82


www.kences1.blogspot.com