The initial euphoria on bank shares in on Monday’s trade appeared to wane in the latter half of the day, as investors realised that banks’ margins might not improve significantly despite the 25-basis-point reduction in the Cash Reserve Ratio (CRR).
While the Reserve Bank of India’s decision to lower CRR is expected to inject Rs 17,000 crore into the system, margins may continue to remain under stress due to insipid demand for loans and lenders’ inability to re-price a majority of their high-cost deposits.
“For banks, a 25-bps cut in CRR would mean a saving of two-three bps on yields. However, we believe the benefit may not actually accrue to banks in the backdrop of higher investments in lower yield SLR (Statutory Liquidity Ratio), lower loan growth and a falling loan-deposit ratio,” said Dhananjay Sinha, co-head of institutional research at Emkay Global Financial Services.
“We expect banks will continue to cut lending rates selectively for a few classes of advances and, consequently, there is a neutral impact on our softer net interest margin estimates for 2012-13 and 2013-14,” he said.
The 12-share Bank Nifty opened the day 1.4 per cent up on the National Stock Exchange (NSE) and gained further to touch an intra-day high of 11,045.45 points (3.8 per cent rise from Friday’s close). But, it pared a part of its gains to close at 10,981.65 points or 3.2 per cent up from its previous close. While most banking stocks ended up, those of HDFC Bank, which touched a 52-week high of Rs 619.95 during intra-day trade, closed one per cent down.
“Today’s rise (in bank shares) is sentiment-driven. The pain is not over yet. There are concerns on asset quality,” said an analyst with a local brokerage, who requested anonymity as he was not authorised to speak to the media.
He added, “We continue to expect margin dilution of 15-20 bps as yields on loans are likely to be under pressure, while only a few banks are in a position to re-price a majority of their high-cost deposits in the second half of the financial year.”
“Amidst undercurrents of inflationary pressures, banks have been given additional liquidity to provide credit to important sectors like agriculture, small & medium enterprises and industry. It remains to be seen, though, whether banks can identify risk profiles acceptable to them and push the chain reaction further,” said Robin Roy, associate director for financial services at PwC India.
Analysts also believe the scope for significant rate cuts in the current financial year is limited, as RBI continues to worry about inflation.
“The outcome of the next policy meeting, to be held in six weeks, has become too close to call. Apart from inflation, the government’s ability to minimise slippage in the subsidy bill will be a key deciding factor. “We think a small 25-bps cut in the repo rate is possible...In any case, the anticipated improvement in liquidity should bring inter-bank yields within the reverse repo-repo corridor of seven-eight per cent,” said Sanjay Mathur, analyst with Royal Bank of Scotland.
