Banking stocks surge in September; analysts cautious

September 18, 2013

After falling for four consecutive months, India’s banking stocks have surged in September on value buying and recent measures announced by the new Reserve Bank of India chief, but analysts remain cautious.

On his first day in office, RBI chief Raghuram Rajan announced measures to prop up the rupee and liberalise the banking system, including higher overseas borrowing limits for lenders and simpler branch opening processes.

The BSE banking index has gained more than 14 percent this month after losing nearly 30 percent during the April-August period, with stocks such as ICICI jumping 20 percent and YES Bank climbing more than 27 percent. The benchmark Sensex has gained around 6.5 percent in September. However, analysts believe the rally could lose steam.

“I don’t think the same rally at this stage is possible to continue. We don’t see too much of an upside for the short-term period because the pressures of liquidity, NPA (and) restructuring are still high,” said Kajal Gandhi, assistant vice-president of research at ICICI Direct. NPA refers to non-performing assets or bad loans.

After rising over 50 percent in 2012, the BSE banking index had struggled this year, especially in recent months when the RBI tightened liquidity by raising short-term interest rates to support the falling rupee.

These measures dampened hopes of an interest rate cut by the RBI and raised short-term borrowing costs for lenders, hurting banking stocks and forcing some banks to raise their loan rates. Morgan Stanley changed its view on India’s financial services stocks to “cautious” soon after RBI measures were announced in mid-July.

The focus now is on Rajan, who holds his first monetary policy review on Sept. 20, with markets looking for cues into the timeframe of the central bank’s cash-tightening steps announced earlier.

Inflation surged to a six-month high in August, complicating matters for Rajan. Hopes are high he can somehow calm inflationary pressure, stabilise the rupee and boost India’s gross domestic product, which grew by 4.4 percent in the June quarter.

“I don’t think there will be any changes from the RBI’s side. One should not expect too much from the policy,” said S P Tulsian, an independent market analyst. “The recovery that we have seen in the banking stocks is largely because of the suction we have seen in the valuation. I don’t think much upside will come.”

Bad loans or non-performing assets are another concern for India’s banks as high interest rates and a slowing economy dent confidence.

According to a Reuters Breakingviews analysis, gross NPAs of India’s top 10 state-run banks have doubled in the past two years to 1.4 trillion rupees. A surge in short-term rates hardens fears of lenders’ profits taking a hit.

In the first quarter of the current fiscal year, top lender State Bank of India reported a second consecutive drop in its quarterly profit, weighed down by loan defaults. Most state-run banks, including Punjab National Bank, have also reported a rise in bad loans.

“Clearly (with) the GDP not looking good, the problem is likely to continue,” said Vaibhav Agrawal, banking analyst at Angel Broking.

(Disclaimer: This article is website-exclusive and cannot be reproduced in any form without permission.  Follow Ankush on Twitter @Ankush_patrakar)

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/