Bank Stocks Outlook: Seen dn; high inflation dashes rate cut hope

[K.Karthik Raja]

Bank Stocks Outlook: Seen dn; high inflation dashes rate cut hope
Saturday, Mar 15

Mumbai - Bank stocks are likely to extend their bear run next
week, as the broader market sentiment remains negative.
"We would rather remain underweight on banking. The valuations
have fallen sharply and the multiples will also go down further.
Concerns of banks taking a hit on their last quarter net profit
due to
mark-to-market losses from their derivatives exposure globally and
lower chances of interest rate cut by Reserve Bank of India on high
inflation are keeping investors away from bank stocks.
Morgan Stanley has downgraded ICICI Bank and cut price target of
the stock to 950 rupees from 1,575 rupees following the mark-to-market
losses on its credit derivatives.
State Bank of India, Bank of Baroda, and Bank of India are also
likely to see mark-to-market losses on their derivatives exposure on
rising credit spreads after the fallout of the US sub-prime crisis.
Market will remain range bound and earnings are likely to give
some
negative surprises that may trigger some more selling when earning
season begins.Asian markets, including India, are following global
markets and so there may be more pain following fears of US slipping
into a recession.
.
SLOWDOWN FEAR
Also, back home, panic started gripping investors after the
industrial
production data showed a higher-than-expected slowdown due to a sharp
fall in growth of capital goods and decline in consumer durables.
India's industrial growth slowed down to 5.3% in January from
11.6% a year ago and below estimates of 7.7%.
It is more to do with sentiment than fundamentals. The IIP data
has added to the bearish sentiment.
Despite a slowdown in the output growth, inflation remains above
RBI's tolerance level of 5%.
Inflation for the week ended Mar 1 was 5.11% compared with 5.02% a
week ago.
High inflation has dashed hopes of any cut in interest rates to
boost
economic growth.
We expect RBI to cut interest rates by 50 bps in 2008-09 to boost
growth.

EARNINGS AHEAD
Banks and companies will start declaring their annual and Jan-Mar
results from April.
Besides seeing large mark-to-market losses on derivatives
exposure, banks are also likely to see a slight squeeze on their net
interest margin following the recent prime lending rate cuts.
Banks cut their PLRs by 50 bps last month, though they have not
yet reduced their deposit rates.
Most banks had introduced special deposit schemes at 10% for one-
year last March that will mature now. So, banks will be able to see
some improvement in their net interest margins only in the June
quarter.
.
FARM LOAN WAIVER

However, clarity on farm loan waiver will restrict the downside of
bank stocks.
Clarity on farm loans is a positive for banks. Now, it is known how
the banks will get back the money.Investors had been awaiting clarity
on the way and time of reimbursement of farm loan write-offs.
Friday, Chidambaram said the government will give 250 bln rupees
as cash to banks for farm debt waiver after June. The next instalments
worth 150 bln rupees in 2009-10, 120 bln rupees in 2010-2011 and 80
bln rupees in 2011-2012.
In the Union Budget 2008-09, Chidambaram asked banks to waive off
600 bln rupees of farm loans and assured that the money will be
refunded to banks.

Friday's closing prices of shares of leading banks in rupees,
compared with a week ago, on National Stock Exchange:
.
Mar 14 Mar 7 % change
.
Andhra Bank 81.45 80.60 1.05
Bank of Baroda 287.30 299.05 -3.93
Bank of India 280.25 271.10 3.38
Canara Bank 222.35 227.90 -2.44
Corporation Bank 254.45 271.30 -6.21
HDFC Bank 1315.45 1282.25 2.59
ICICI Bank 876.95 893.40 -1.84
Oriental Bank of Commerce 193.00 206.60 -6.58
Kotak Mahindra Bank 662.05 627.85 5.45
Punjab National Bank 471.75 498.60 -5.39
State Bank of India 1712.85 1839.75 -6.90
Union Bank of India 145.65 141.75 2.75
.
Sensex 15760.52 15975.52 -1.35
Nifty 4745.8 4771.6 -0.54
CNX Bank Index 7106 7268.15 -2.23


K.Karthik Raja