Bank stocks to take a hit on RBI rates hike

Bank shares are likely to fall next week after Reserve Bank of India surprised many market players by hiking the repo rate and cash reserve ratio about three weeks before its annual policy statement.

RBI's move is likely to have a negative impact on all Sensex shares, but banking and real estate shares are expected to be hit the most, dealers said.

"Besides repo and CRR hike, they have also reduced the interest payment on CRR balance. This will affect the bank shares more," said Prakash Rajdev, chief dealer, Khandwala Securities.

The central bank on Friday evening announced the hike of repo rate by 25 bps to 7.75 per cent and CRR by 50 bps in two stages by April 28. RBI also said it will cut the interest payment on excess CRR of banks to 0.5 per cent from 1 per cent, effective April 14.

Profitability impact: Banks were not expecting to extend the high interest rates on deposits beyond March-end.

But pressure on deposit rates will continue, with the hike in repo rate""the borrowing rate of banks from RBI""and CRR""the portion of deposits that will be kept with RBI.

"We will extend the Square Drive deposit scheme to April from March," a senior official at Bank of Baroda said.

Bank of Baroda launched the one-year Square Drive deposit scheme offering 9 per cent interest, as a part of its year-end deposit mobilisation drive.

With deposit rates rising more than lending rates, profitability of banks will be affected, several state-run banks' heads said.

"Interest margins will be under pressure," said Andhra Bank Chairman and Managing Director K Ramakrishnan.

Private sector banks, led by ICICI Bank, may hike lending rates, to protect their net interest margins.

Earnings woes: Besides coping with sudden blow from RBI at the beginning of the next financial year, banks are now busy managing their 2006-07 balance sheets.

With the earnings season approaching, bank shares are likely to see further weakness, on concerns of a lacklustre performance in the last quarter.

Banks' treasury portfolio may witness a depreciation due to rise in gilt yields in January-March.

The benchmark 10-year 2017 paper yield has risen about 50 basis points since January.The yield on the 10-year, 2017 bond today was at 8.04 per cent, against 7.52 per cent on January 2.

"Private sector banks have a cushion up to 8.2 per cent for gilt yields but the public sector banks have provisions for yields only up to 7.50-7.75 per cent," said Sarika Lohra, analyst, Angel Broking.

"Therefore PSU banks, such as SBI, Union Bank of India, Bank of Baroda and Punjab National Bank, would take greater hit due to depreciation on gilt portfolio," Lohra said.