RBI measures fail to cheer investors

Bank shares pare early gains, most extend losses

The initial optimism over the Reserve Bank of India’s (RBI) late Tuesday actions was short-lived. Within hours, the new-found optimism over banking stocks evaporated and many of the shares ended the day below their previous close.

On Tuesday, the RBI signalled a partial relaxation in its tight money policy and announced measures to stabilise the local bond market. To improve liquidity, the central bank said it would buy bonds up to Rs 8,000 crore through open market operations.

It also announced steps to soften the blow on banks' profitability due to rise in bond yields. Banks have been allowed to retain SLR (statutory liquidity ratio) holding at 24.5 per cent of their net demand and time liabilities in the held to maturity category (HTM) instead of 23 per cent. Lenders can also transfer SLR securities to the HTM category from available for sale (AFS) and held for trading (HFT) categories at prices as of July 15 – the date of the RBI's first liquidity tightening action.

According to estimates by rating agency Icra, mark-to-market (MTM) losses of the banks are expected to reduce from the earlier estimates of Rs 25,000 - 30,000 crore in the second quater, 2014 to Rs 3,000 - 5,500 crore. Although losses for the balance year (July 2013-March 2014) are estimated to be higher at Rs 9,000 -17,000 crore.

Banks would also be permitted to spread the net depreciation on account of MTM valuation of securities held under the AFS and HFT categories over the remaining period of 2013-14 in equal installments.

Investors appeared to cheer the moves as banking stocks gained over four per cent in early trade. However, analysts advised caution till there was clarity on the liquidity situation at least in the medium-term. “RBI's actions provided some relief and were sentimentally positive. But we would continue to remain cautious on banking stocks till we get a clear picture on how the liquidity situation would be in the medium to long-term,” an analyst with a domestic brokerage said requesting anonymity.

A few even suggested the central bank's measures to spread MTM losses over a period of time would probably cloak the correct book value of banks. “RBI's statement clarifies that these measures aim to prevent adverse effects on the banks’ ability to provide credit to the productive sectors in the economy. We believe these measures, whilst taken up with the right intentions, reduce transparency on the banks' book value,” Chetan Ahya and Upasana Chachra, analysts with Morgan Stanley said in a note to clients.

Barring a few, shares of public sector banks ended one-seven per cent lower, while shares of most private lenders erased early gains and ended marginally up from the previous close.

Since the banks have an option to maintain a higher HTM book, which is insulated from MTM losses ( now mandated at 24.5 per cent of net demand and time liabilities as against 23 per cent by March 2014 in line with earlier instructions), Icra also expects banks might reduce the size of AFS / HFT book. According to Icra estimates, the AFS/HFT investment book might shrink to five-six per cent of total assets by September 30.