Bank stocks seen dull this week, awaits policy cue

Bank stocks are likely to be lacklustre this week with a downward bias in the absence of any positive triggers.

However, mild buying at low levels after the bank shares fell more than the broader Sensex, is expected to limit the downside.

CNX Bank index fell 7.12 per cent from its close on December 8 versus 2.35 per cent fall in Nifty.

"This fall was expected considering that the rising pressure on the net interest margin of the banks. Now the market will wait for signals from RBI regarding its third quarter credit policy (review)," an analyst said.

Banks' margins are likely to narrow 3-4 basis points following 50 basis point hike in cash reserve ratio announced by Reserve Bank of India December 8. The hike will be effective in two stages of 25 basis points each, first from Saturday and second from January 3.

The announcement of the twin hike caught investors off guard.

Investors are likely to be cautious ahead of the RBI's third quarter monetary policy review in January and will await cues on interest rates.

"Investors will buy with every dip in share prices as valuations look attractive for bank stocks," Kanan Shah, analyst at Networth Stock Broking, said.

Many bankers expect the RBI to continue its monetary tightening measure in January to slow down the robust credit growth.

"The RBI will sterilise liquidity even if there is any inflow in January," Anil Parolkar, treasurer, Bank of Baroda, said.

Bankers view the CRR hike as a pre-emptive measure to contain liquidity.

Though investors have factored in the CRR hike, investor sentiment is seen cautious after the first phase of the hike comes into effect from Saturday.

With liquidity being tight, call rate over 10 per cent, another Rs 6,750 crore outflow via CRR from Saturday will only worsen banks' funding position.

The full-fledged impact of the additional outflow of funds due to CRR hike will be come in banks' last quarter results as the second phase of CRR hike will take place from January 6.

Analysts said the hike in lending rates may offset the loss of funds via the CRR hike.

HDFC Bank, ICICI Bank, and Centurion Bank of Punjab have hiked their respective lending rates following the hike.

Other banks may hike their lending rates in the next 15-20 days, analysts said.

State Bank of India Managing Director Yogesh Agarwal said the bank's net interest margin may fall 0.3 per cent due to the hike in CRR.

Banks do not get any interest payment on excess CRR maintained with RBI and this has added to banks' liquidity woes.

Finance Minister P Chidambaram has asked the RBI to consider giving some interest on CRR, Agarwal said.

"If this happens (RBI agrees to pay interest on CRR), then all bank stocks would see 4-5 per cent rise," a dealer said.