Bank indices surge 4% on RBI moves

With tough asset quality and monetary cycle ahead, analysts recommend lenders with more of low-cost deposits

Banking shares were in demand on Tuesday, trading higher by up to seven per cent and erasing their entire early morning losses, after the Reserve Bank of India (RBI) reduced the Marginal Standing Facility (MSF) rate by 25 basis points (bps) to 8.75 per cent, from the earlier nine per cent. Banks usually tap the MSF rate during acute cash tightness. The central bank also increased the liquidity provided through term repos of seven-day and 14-day tenor from 0.25 per cent of net demand and time liabilities (NDTL) to 0.5 per cent, with immediate effect.

YES Bank and ICICI Bank were the top gainers in this space, surging 6.9 per cent and six per cent, respectively.

The National Stock Exchange’s banking share index, the Bank Nifty, and that of the BSE exchange, the S&P BSE Bankex, outperformed the frontline indices – the CNX Nifty (up nearly two per cent) and S&P BSE Sensex (up 1.7 per cent) – by gaining 4.35 per cent each. The Bank Nifty touched a high of 11,268 in intra-day deals and recovered 5.6 per cent or 599 points, from a low of 10,669 in early morning trade.

“The easing of short-term interest rates will more substantially benefit banks whose reliance on bulk/wholesale deposits is significant. Softening of blended deposit cost would translate into higher net interest margins (NIMs), especially in the context of lagged re-pricing of loans from the base rate hike in August,” says Amar Ambani, head of research at IIFL.

Adding: “Those likely to benefit meaningfully are YES Bank, IndusInd Bank, Axis Bank, ING Vysya Bank and ICICI Bank. Even non-banking finance companies (NBFCs) such as LIC Housing Finance, M&M Financial and Shriram Transport Finance Company (STFC) are likely to benefit.”

Sujan Hajra, Clyton Fernandes and Kaitav Shah of Anand Rathi Research suggested in a report after the policy announcements that in the immediate term, prospects for the banking sector would more closely follow the asset quality and economic cycles, which are likely to be sluggish. Therefore, they prefer banks which are better set to manage the likely tough asset quality and monetary cycle ahead, with large proportions of low-cost deposits to protect their NIMs and high Tier-1 capital, to adequately cushion against loan defaults.

ICICI Bank, YES Bank and ING Vysya Bank are their top buys in the banking pack, while SBI and Canara Bank are their top sells. Among NBFCs, they recommend Bajaj Finance and Chola Finance.

RBI Governor Raghuram Rajan raised the repo rate by 25 bps to 7.25 per cent, while keeping the cash reserve ratio unchanged at four per cent. Most analysts expect RBI would raise the repo rate by another 25 bps later in the financial year.

“Given the inflationary expectations for the rest of the year, we believe the RBI could increase the repo rate again by 25 bps but provide liquidity using other monetary tools at its disposal,” said Naresh Takkar, managing director, ICRA.

Adds Lakshmi Iyer, senior vice president and head of fixed income at Kotak Mutual Fund: “It is evident from the stance that improving systemic liquidity and managing inflation are now the key policy objectives driving the central banker’s decision. This could see the yield curve flattening further, going ahead. Having said that, despite a good kharif season, the money velocity in the agri-sector may be imposing a high price floor for the agri commodities. As a result, the inflation may not moderate in a hurry and may require further policy measures going ahead.”