 "Rally in banking stocks to be short-lived, say analysts")
Many believe the rally would be short-lived. “It is not fresh buying but covering of short positions would push up stocks because of the sheer size of these bets. The recovery would last for a day or two because FIIs (foreign institutional investors) still remain bearish on the market,” said Siddarth Bhamre, head (derivatives), Angel Broking.
As most participants were bearish on the sector, owing to rising asset quality pressure, slowing loan growth and RBI’s measures aimed at tightening liquidity and increasing short-term rates (to prop up the rupee), the stocks fell to historically low levels and, therefore, the rebound wasn’t surprising.
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While short-term steps such as lower swap cost (3.5 per cent) on foreign currency non-repatriable deposits and foreign currency borrowings would support the rupee, these would have minimal earnings impact on banks. “These measures would have limited impact on banks’ earnings, as the landed cost of these deposits would be almost similar to term deposits and the ability to raise borrowings, at least, has been impacted in the current environment,” says M B Mahesh, banking analyst at Kotak Institutional Equities. Given hedging costs stood at six-eight per cent, foreign borrowing for banks was unattractive. Banks with significant global presence (State Bank of India, Bank of Baroda, Bank of India and ICICI Bank), however, would partly gain from these measures.
Other long-term measures such as announcement of new banking licences by January 2014 and flexibility to banks to open new branches would have a positive impact on the sector, but also increase competition.
Reduction in the statutory liquidity ratio (SLR) and revising priority sector lending guidelines are also underway. Foreign-owned banks would be allowed to become fully-owned subsidiaries and differentiated licensing for small banks/local banks, etc, would also be considered. These measures are long-term ones and their impact can be assessed only after the actual guidelines are finalised.
While RBI plans to improve efficiency of debt recovery tribunals and asset reconstruction companies, experts believe it is unlikely to ease asset quality woes in the sector. Vaibhav Agarwal, banking analyst at Angel Broking, says, “The basic pain in asset quality cannot be wished away by streamlining the recovery processes.”
Dhananjay Sinha, head (institutional research), Emkay Global, says, “Even as financial markets reflected much rejoice on the maiden statement made by Rajan, we remain quite unenthused. For one, some of the intents of the governor highlighted in the speech are a carry-forward from the previous governor’s actions such as the primary objective of ensuring price stability and not pandering the masses through popular measures. Thus, the governor hasn’t hinted the tightening measures initiated by his predecessor would be reversed. Two, many of the initiatives enlisted by him as a road map through his term bear some stamp of his predecessors, including reducing SLR and subsidiarisation of foreign banks.” He says market reactions to the RBI governor's statement have been overly positive, with markets probably interpreting his stance on monetary policy as a reversal of the tightening implemented by his predecessor. However, he believes there is very little in the speech indicating a reversal.