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Foreign institutional investors (FIIs) reduced their exposure to Indian banking stocks during the second quarter on concerns of margin stress due to slowdown in the economy, rising non-performing assets and higher cost of funds.
FIIs have cut their holdings in public as well as private sector banks during the quarter ended September. Of the 25 banks that have thus far released the quarter’s shareholding pattern, data suggests FIIs’ stake in 20 banks fell by up to six percentage points. In Bank of Baroda, Jammu and Kashmir Bank, Axis Bank and UCO Bank, FIIs have raised their holdings marginally over the previous quarter.
FIIs’ stake in State Bank of India (SBI), HDFC Bank, ICICI Bank, IndusInd Bank, Indian Bank, Andhra Bank and Karnataka Bank has declined by one to six per cent in the July-September quarter.
In HDFC Bank, FIIs have reduced their holding after a gap of more than two years. FIIs’ stake in the country’s largest private sector lender has declined by nearly one percentage points at 33.61 per cent in the September quarter. FIIs held 34.49 per cent stake at the end of June quarter. FIIs’ stake in ICICI Bank has declined by about two percentage points to 37.56 per cent from 39.24 per cent, while in SBI, their holdings reduced to 8.88 per cent from 9.79 per cent.
In Karnataka Bank, FIIs’ stake has declined the most by 6.4 percentage points to 16.45 per cent from 22.83 per cent in the past three months. During the quarter, the stock slipped nearly 26 per cent to Rs 83.40 from Rs 112.
Currency woes
Most banking stocks had plunged between 20 and 40 per cent in Q2 after the Reserve Bank of India (RBI) announced a slew of measures to support the rupee, which depreciated 14 per cent to 67.73 against the dollar in early September, including raising the lending rates for banks to make the currency dearer.
The National Stock Exchange banking index, Bank Nifty, which measures the price movement of banking shares, had reported its sharpest quarterly fall of 23 per cent, compared to less than five per cent decline in the benchmark CNX Nifty.
Indian Bank, Union Bank of India, Canara Bank, United Bank of India, YES Bank, Andhra Bank, Dena Bank, Federal Bank and Corporation Bank had tanked a little more than 30 per cent during the quarter. From October, the Bank Nifty has also recovered eight per cent compared to a 6.2 per cent rise in the benchmark index after RBI yet again announced measures to ease liquidity by cutting the marginal standing facility rate by another 50 basis points to nine per cent.
Outlook
Meanwhile, most analysts feel the performance of the banking sector is likely to remain dismal even in the second quarter of FY14, as most lenders are likely to report moderate growth in revenue, owing to tepid average growth in the loan book and declining traction in core fee income.
Banks’ net interest margin is also likely to be under pressure during the quarter due to significant increase in bulk deposit rates, said an analyst with Karvy Stock Broking.
“It will be a very different quarter versus the last few, with asset quality issues persisting for government banks. Banks are to see elevated margin pressures due to rise in short-term rates and lower lending rates and mark-to-market hits arising out of rise in bond yields, despite the recent RBI dispensation and also wage revision provisions,” said an analyst with Bank of America Merrill Lynch.
However, according to analysts at Edelweiss Securities the flurry of action undertaken by RBI to curb rupee volatility, coupled with its reversal on interest rate stance, could delay economic recovery. “If the current difficult business environment persists, we expect stress to start trickling into asset quality of banks.”
