S&P's IDBI downgrade sparks banking sell-off

Analysts worried about further downgrades in the sector

Bank shares were at the receiving end of Tuesday, as Standard & Poor’s downgrade of IDBI Bank to “below investment grade” sparked worries if other lenders might be given a similar rating. Yields on credit default swaps (CDS) of Indian banks listed in the US rose on Monday night, prompting traders to cut bets ahead of the November series futures and options expiry session on Thursday. The National Stock Exchange’s Bank Nifty fell 1.6 per cent on Tuesday. Public-sector banks such as Canara Bank, Bank of India, Bank of Baroda and Union Bank of India led the downsides, dropping about 3.5 per cent each. Most private-sector banks ended higher, with YES Bank as the highest gainer at 3.2 per cent after its inclusion in the MSCI India Index.

“The downgrade reflects the poor economic growth and the high-interest rate scenario in the economy. The concerns on the public-sector banks’ side are higher due to concerns of low growth and weak asset quality,” said Sunil Jain, vice-president (equity research) at Nirmal Bang Securities. “If economic activity and growth don’t pick up, the private sector banks growth could also suffer.”

Overseas investors reacted adversely to the IDBI ratings downgrade. CDS of IDBI, ICICI Bank, State Bank of India and Exim Bank fell by 1.9 per cent, as yield spreads widened. CDS spreads are an indicator of risk perceptions of investors. A widening CDS spread implies higher risk perception among investors about Indian banks.  “It is a worry because it means overseas investors see higher risks in investing in Indian banks. The risks could be country-specific risks or bank-specific risks,” said a banking analyst with a foreign brokerage.

Analysts said the downgrade has given investors a reason to book profits in public-sector banks. The CNX PSU bank index has risen 17 per cent in the past three months against the 10.6 per cent gains in the Nifty.

“Public sector banks had run ahead of their fundamentals over the past month with the market discounting that worst of asset quality issues were behind,” said Amar Ambani, head of research, IIFL.

Concerns over the Fed taper are another reason for the spreads widening. Derivative analysts said no fresh positions were being built in bank contracts. “When the Nifty was at higher levels, we had seen short positions being built in some of the banking stocks. Subsequently, as the Nifty slipped, we also saw some short-covering, which is why some of these stocks gained. Therefore, we believe traders will continue trade in this range,” said Amit Gupta, head of derivatives at ICICI Direct.

Forty to 50 per cent of short positions in these stocks have already been closed. Some analysts believe the stocks are likely to see further downsides in December. Private-sector banks are likely to see a decline of 10-15 per cent, while public sector banks could fall seven-eight per cent more.