Bank Stocks Outlook: Bears to prevail over fundamentals next wk

[B. Karthick]

Bank Stocks Outlook: Bears to prevail over fundamentals next wk
Saturday, Jun 28

Bank shares are seen under pressure owing to bearish sentiment
stemming from fears high inflation and oil prices are here to stay for
some
more time.
At the current juncture, it is the sentiment that will drive bank
stocks
and not fundamentals. Though valuations look attractive, the overall
sentiment is negative because of double-digit inflation and rising
crude oil
prices.
Crude oil futures for August delivery on NYMEX hit an all-time
high of
$142.12 a barrel intraday today due to supply concerns from Libya,
dollar
weakness, and heavy speculative buying.
India's headline inflation for week ended Jun 14 stood at 11.42%--
double-digit for the second week in succession. Finance ministry
officials said the present situation may continue for a few more
weeks.
These factors may lead to further monetary tightening by Reserve
Bank of
India.
RBI hiked banks' cash reserve ratio and repo rate 50bps to 8.75%
and
8.50%, respectively, Tuesday, an action aimed at curbing demand.
Banks reacted swiftly and hiked their benchmark prime lending rate
and
deposit rates.
The country's largest lender State Bank of India hiked its BPLR by
50bps,
followed by Union Bank of India and Punjab National Bank, among
others.
Some other banks have also hiked the deposit rates.
At a time when inflation rate is double-digit, banks do not have
any
option but to hike deposit rates.

MARGIN PRESSURE
The effect of the lending rate hike will be by and large negated
by the
increase in deposit rates.
Margins will continue to be under pressure for banks, mainly
public
sector ones. Private banks' BPLR are relatively higher than the state-
run
ones.
Banks are in for double trouble: on the one hand, margins will be
under
pressure and, on the other, credit growth will be hampered because of
higher
lending rates.
Some of the banks have already said they will cut down FY09 loan
growth
projections.
For example, Indian Overseas Bank has reduced its loan growth
target for
FY09 to 17-18% compared with 20-22% projected at the beginning of
FY09.
The other concern that will dog banks is the chance of an increase
in
delinquencies as a result of higher lending rates.
Asset quality of Indian banks may deteriorate as interest rates
are
moving north. This is particularly true for retail sector like home
and
auto.
Banks are expected to be cautious in lending to retail sector,
where the
margins are better compared with corporate sector.
The only glimmer of hope is attractive valuations.
Valuations of banks are probably the lowest in the last couple of
years.
As fundamentally banks are strong, this is the right time to buy.

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

Jun 27 Jun 20 % change

Andhra Bank 56.65 64.45 -12.10
Bank of Baroda 204.70 225.30 -9.14
Bank of India 225.10 247.35 -9.00
Canara Bank 178.45 195.45 -8.70
Corporation Bank 251.70 283.95 -11.36
HDFC Bank 1021.60 1098.25 -6.98
ICICI Bank 652.15 732.95 -11.02
Oriental Bank of Commerce 131.25 154.50 -15.05
Kotak Mahindra Bank 490.60 595.00 -17.55
Punjab National Bank 402.05 430.75 -6.66
State Bank of India 1161.20 1248.95 -7.03
Union Bank of India 110.85 123.75 -10.42

Sensex 13802.22 14571.29 -5.28
Nifty 4136.65 4347.55 -4.85
CNX Bank Index 5210.90 5758.60 -9.51

End

B.Karthick,
Research Analyst.