Bank Stocks Outlook: Weak next wk on worry of more RBI tightening

[B. Karthick]

Bank Stocks Outlook: Weak next wk on worry of more RBI tightening
Saturday, Aug 23

Banking shares are likely to remain weak next week as concerns of
further monetary tightening measures by Reserve Bank of India loom.
There is jitteriness in the market. Credit growth is still above
RBI's
projection. Inflation is also high.
Thursday, Bank Nifty fell around 5% while Nifty fell around 3% on
concerns that RBI may hike cash reserve ratio again as inflation is
creeping up.
Inflation for week ended Aug 9 has risen to 12.63%.
Banks' credit has grown 2.8% during Apr-Aug compared with a fall
of 0.1% a year ago.
Year to Aug 1, banks' credit grew 25.8% compared with 23.3% a year
ago. The RBI has projected 20% credit growth in 2008-09.
In the short-term, investors are likely to remain cautious on the
banking sector as they will wait for negative factors like slowing
credit growth, and lower treasury income to play out.

RAY OF HOPE
However, we are hopeful the recent hikes in benchmark prime
lending rates will ease some pressure from net interest margins.
The PLR hike will be effective immediately while deposit rate hike
will be effective with a lag. Not many customers will break their
deposits and renew them at a higher rate.
Private sector banks' net interest margins will improve more than
state-run banks as the latter have not hiked all segments of floating
loan rate.
For instance, State Bank of India has hiked its BPLR by 100 basis
points but said it will not hike home loan rates of up to 3 mln rupees
for existing and new customers. Similarly, SBI has not hiked existing
auto and education loan rates.
However, it has hiked its deposit rates by up to 75bps.

ON THE HORIZON
Though most investors are not ready to trade or even speculate on
banking sector now, there are a few contrarians.
RBI had hiked CRR by 25 bps to 9% and repo rate by 50 bps to 9% on
Jul 29.
The CRR hike will be effective from Aug 30, which will drain away
90 bln rupees from the banking system.

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

Aug 22 Aug 14 % change

Andhra Bank 54.70 56.95 -3.95
Bank of Baroda 254.60 255.00 -0.16
Bank of India 258.00 267.60 -3.59
Canara Bank 200.75 204.75 -1.95
Corporation Bank 273.00 272.45 0.20
HDFC Bank 1194.00 1174.80 1.63
ICICI Bank 644.55 673.45 -4.29
Oriental Bank of Commerce 156.65 160.65 -2.49
Kotak Mahindra Bank 568.75 614.70 -7.48
Punjab National Bank 444.65 465.90 -4.56
State Bank of India 1344.10 1455.20 -7.63
Union Bank of India 129.10 138.10 -6.52

Sensex 14401.49 14724.18 -2.19
Nifty 4327.45 4430.7 -2.33
CNX Bank Index 5776.05 6030.05 -4.21

End

B.Karthick
Research Analyst.