Bank stocks cash in on retail credit hopes

Banking sector stocks are back in the reckoning on expectations of a boom in retail credit translating into strong bank profitability.

Most stocks gained between 1 per cent and 19 per cent on the Bombay Stock Exchange (BSE) on Thursday. Allahabad Bank, Andhra Bank, Canara Bank, Kotak Mahindra Bank, Punjab National Bank, Union Bank of India and UTI Bank closed at their all-time highs.

State Bank of India (SBI), Bank of Baroda, Andhra Bank, Indian Overseas Bank, Oriental Bank of Commerce and Syndicate Bank are also trading close to their respective 52-week highs.

The BSE Bankex, the Bombay Stock Exchange index of banking stocks, has risen by 9 per cent in the last one week from 3136.58 on November 25 to 3418.46 on Thursday.

In comparison, the Sensex has risen by 5 per cent from 6035.03 to 6328.43 on Thursday.

"Increased spending on consumer durables and automobiles and improved demand for housing has spurred interest in bank stocks," said an analyst tracking the sector.

Retail lending has been a key profit driver for banks in recent times. The retail portfolio constituted 21.5 per cent of the total outstanding advances as on March 31, 2004. The percentage of retail loans turning bad, at 2.5 per cent, also compares favourably with the gross bad loans ratio (7.4 per cent) for the entire loan portfolio.

Kotak Mahindra Bank touched a lifetime high of Rs 278.95 in intra-day trading at BSE before closing at Rs 271.85. The stock gained 2.58 per cent against its previous day's close of Rs 265.

Punjab National Bank hit Rs 405 before close at Rs 379.70.

Stock was appreciated by 8 per cent from its previous day's close of Rs 351.40.

Canara Bank hit Rs 204.40 before close at Rs 201.95. The stock appreciated by 5.5 per cent from its previous day's close of Rs 191.50.

Andhra Bank Rs 74.35, Allahabad Bank Rs 68.50, UTI Bank Rs 195.50 and Union Bank of India Rs 106.30 touched an all time high price during the intra day trade at BSE.

The recent wage agreement between the Indian Banks' Association and the employee unions that provides for a 13.25 per cent hike in wages for bank employees with retrospective effect from November 2002 is unlikely to drag down banks' profitability in a major way, analysts said.

Most banks have made provisions for 12-12.5 per cent wage inflation and, hence, the incremental impact would be limited, they added.

Strong core performance is also likely to offset the wage bill hit.

Another very positive development is the bank unions agreeing on limited transfer of employees. This would help banks redeploy staff according to business needs.

With the implementation of core banking software and automation, employees would be increasingly required to be redeployed to other areas to assume marketing and other business development roles.

Other bank stocks that gained on Thursday include, Bank of Maharashtra, up by 19 per cent to Rs 32.85 (Rs 27.60), Corporation Bank 17 per cent to Rs 356.20 (Rs 304.39), J & K Bank 13 per cent to Rs 327.60 (Rs 291) and SBI 8 per cent to Rs 581.70 (Rs 540.60).