)
Shares of public sector (PSU) banks came under heavy selling pressure on Tuesday, falling up to 8% on the bourses after the Reserve Bank of India announced a slew of measures to address exchange rate volatility post market hours on Monday.
The NSE, PSU banking shares index, CNX PSU Bank lost nearly 5% as compared to 1.5% fall in benchmark Nifty at 1324 hours. The index hit a 52-week low of 2,579 during intra-day trades.
Among individual stocks, Canara Bank and Oriental Bank of Commerce lost 8% each on the National Stock Exchange (NSE). State Bank of India (SBI), Union Bank of India, Punjab National Bank (PNB), Syndicate Bank, IDBI Bank, Bank of Baroda (BoB) and Bank of India are among other notable PSU banks down in the range of 4–5%.
Impact
Banks and NBFCs
Analysts at Angel Broking suggest that though the RBI’s move is positive for the currency, it is likely to increase the cost of funds for banks.
Points out Jyotivardhan Jaipuria, managing director and head of research, Bank of America-Merrill Lynch: “Information technology (IT) stocks could correct if the RBI’s measures succeed in Rupee pullback. High debt companies could see correction. Some of the large-cap companies with high debt include JP Associates, DLF and Adani Enterprise. Bank stocks are over-owned and could correct due to rise in bond yield. While HDFC Bank is unlikely to see major correction, we would regard any correction in ICICI Bank as a buying opportunity. Avoid PSU banks which could correct due to rise in bond yields.”
“In terms of direct impact we believe entities that are most reliant on short-term wholesale funding will be adversely impacted. Yes Bank and IndusInd Bank have significant reliance on these markets. NBFCs should also be negatively impacted. PSU banks, particularly SBI have little or no reliance on short-term wholesale funding. If the higher rates were to persist (depending on how long RBI adopts this stance) and impact GDP (gross domestic product) growth, then that would impact the entire banking system negatively,” points out a Barclays Research report.
The measures announced by the central bank are a classic textbook response to a weakening currency: tighten liquidity (and raise rates). They will tighten domestic liquidity, raise short-term interest rates, increase the relative interest rate differential and possibly stem debt outflows, points out Sonal Varma, an economist at Nomura. The probability of a rate hike, if today's measures are not successful in stemming rupee depreciation, has gone up, she points out.
“Banking stocks have faced the music today on account of key overnight developments. For the Bank Nifty, 11367 was an important support and spot is currently below the same. This level needs to be watched closely on a closing basis. Banking stocks need to be given a few more days to settle before one can take an investment call on the same. SBI has support near Rs 1,800; ICICI Bank at Rs 940 and HDFC Bank at Rs 650,” said Ranak Merchant, technical analyst - strategies, Sushil Financial Services.
E&C companies
Analysts at Ambit Capital believe that the move will be a negative for the E&C (engineering & construction) companies as their working capital cycles continue to remain stretched due to delayed payments from both public as well as private clients.
“The move will adversely impact our estimates mostly for the highly leveraged companies such as NCC, Blue Star and Sadbhav Engineering as this will may raise their cost of borrowing and keeps working capital cycle stretched; L&T, VA Tech, Voltas and EIL will not be impacted significantly by the same given low/no leverage on their balance sheets,” points out their client note.
