Bank stocks fall on RBI status quo, bad loan concerns

All banking names had seen sharp increases since Jan 15, when the RBI had cut rates by 25 basis points

Shares of major banks tumbled on Tuesday with the Reserve Bank of India (RBI) maintaining status quo on interest rates and owing to worries surrounding bad loans. All the 12 components in the BSE Bankex, a barometer for performance of banking shares, ended with losses. The index ended 2.6 per cent lower, compared to 0.42 per cent decline in the benchmark Sensex.

The losses were led by state-owned Punjab National Bank (PNB), whose shares dropped eight per cent after its third-quarter profits missed analysts estimates owing to spike in non-performing assets (NPAs).

The shares of Axis Bank fell five per cent, while that of Kotak Mahindra Bank dropped three per cent. Larger banks - State Bank of India (-2.5 per cent), ICICI Bank (-1.5 per cent) and HDFC Bank (-1.8 per cent) - too, saw heavy selling.

Most banks had been witnessing sharp increases since January 15, when the RBI had cut rates by 25 basis points in an unscheduled meeting.

On Tuesday, the central bank kept the repo rate unchanged at 7.75 per cent and said the next reduction might not take place before the Union Budget, slated for February 28.

According to analysts, banking stocks could continue to underperform the market as asset quality concerns are likely to plague the banking system for the next few quarters.

Vaibhav Agrawal, vice-president research – banking at Angel Broking, said asset quality might continue to remain poor for certain banks in the next quarter as well but could see an improvement with the economic revival. On Tuesday, PNB and Oriental Bank of Commerce posted subdued earnings as they had to make higher provisioning to cover for bad loans. Earlier, Bank of Baroda and Union Bank had reported weak earnings and jump in NPAs.

“Bank results have shown that the market has run ahead of fundamentals and that an economic recovery will take more time that previously thought. “The RBI policy also did not give a reason to cheer,” Bloomberg quoted R K Gupta, managing director of Taurus Asset Management as saying.

According to market players, following a 35 per cent jump in the past six months, banking stocks are vulnerable to steep corrections if investor sentiment turns negative.

In a recent report, Foreign brokerage Goldman Sachs said it had turned cautious on the financial sector owing to the sharp gains seen in recent months.

“We recently turned more cautious on financials, after significant valuation re-ratings. While our macro team remains long-term positive on the Indian macro environment, we acknowledge the near- to medium-term risk to earnings from slower reforms and their impact on the investment cycle,” the brokerage said in a report.