Bank stocks back in vogue as yields head south

Banking stocks were the biggest gainers on the stock exchanges on Wednesday in anticipation of a sharp fall in bond yields boosting their bottomlines.

Large-cap stocks like State Bank of India (SBI), ICICI Bank and HDFC and mid-caps like Federal Bank, Bank of India and Oriental Bank of Commerce led the sharp rise in prices of shares of banks across the board.

The BSE Bankex increased 3.96 per cent to close at 5,547.75 points. The NSE Bank Nifty was up 4.15 per cent at 4,823.90 points.

The BSE Bankex was the top gainer index, even as oil and gas and FMCG indices gained around 1 per cent each, while capital goods, auto, IT and health indices were up around 2 per cent each.

The yield on the benchmark 10-year bond has fallen 66 basis points from a four-and-a-half-year high in mid-July. The 10-year government bond yield was 7.74 per cent at close on Wednesday.

Banks had made provisions for depreciation in their investment portfolio in the first quarter of 2006-07 when the yields were much higher. The provisions were made based on the 10-year yield at 8.12 per cent at the end of June 2006.

Lower yields on bonds will provide room for them to write back provisions made for depreciation in their debt investments and thereby enable them to report higher profits in the second quarter ending September 2006. Dealers expect bond yields to remain benign till the end of this month.

"With the yields going down, the banks expect better numbers this quarter. Also, the government's attempts to begin consolidation of public sector banks are gathering pace, which can be attributed as the reason behind this momentum," Sarika Purohit Lohra, analyst at Angel Broking, said.

"The bank stocks have been performing well for the last few weeks. The UWB-IDBI Bank decision was not the only reason for stocks to rise, but with better Q2 numbers awaited, there is positive sentiment for the banking stocks," Vishal Goyal, analyst with Edelweiss Capital, said.

On Tuesday, the BSE Bankex had recorded an increase of 3.96 per cent. Federal Bank was the top gainer with a 10.13 per cent increase, followed by Bank of India, Oriental Bank of Commerce, Andhra Bank and Union Bank.