Bank stocks rally after RBI move on bond losses; Bank Nifty index gains 1%

Banking stocks rallied on Tuesday after the Reserve Bank of India (RBI) allowed spreading of losses on bond investments. The Bank Nifty index and the Nifty PSU Bank index gained one per cent and 1.65 per cent, respectively. ICICI Bank gained three per cent, recovering from its near six per cent drop a day earlier. Bank of Baroda rose 2.3 per cent and State Bank of India gained 1.6 per cent. Most analysts, however, see this as a temporary balm and expect pressure on banking stocks to remain, given the other structural headwinds: How brokerages are reading this:
 
JPMorgan
 
l   While RBI’s decision to provide some accounting relief eases the pressure on Q4 earnings for banks, it merely postpones the problem to fiscal 2019
l   Taking the pressure off bond yields will be a net benefit for public sector banks (PSBs)
l   Decision could trigger a stock rally in the sector and investors should use that “temporary” surge to exit PSBs, as significant changes persist for these banks in terms of low capital ratios, eroding deposit franchises and the need to overhaul credit systems.
 
Nomura
 
l   The move will only provide a temporary relief to PSBs, particularly SBI and Punjab National Bank, whose mark-to-market-related provisioning was large in the December quarter

l   This will only be considered as tier-II capital and will be negative for “capital-starved” state banks
l   The relief is restricted mainly to the losses incurred in the third and fourth quarters. Any further increase in bond yields from here won’t be spread over (??)
 
Motilal Oswal Securities
 
l   This could act as a small trigger for the banking stocks today but no one is going to go berserk, as the bigger issues still remain. They still need to be resolved
 
IDFC Securities
 
l   Q4 earnings will look better but fiscal 2019 will be unchanged
l   Earnings will remain weak and banks may still report losses
 
Sharekhan
 
l   The RBI measure is positive for PSBs. However, we still remain negative on the PSB sector, given the structural headwinds
l   We only prefer SBI among state-owned banks
 
 
Sources: Bloomberg, BS Research