RBI's boost for banks: Should you buy?

In its latest move to calm the bond markets and infuse liquidity into the system, the Reserve Bank of India (RBI) has decided to allow banks to transfer SLR (statutory liquidity ratio) securities to HTM  (Held to Maturity) category from available for sale (AFS) / held for trading (HFT) categories up to the limit of 24.5% as a one-time measure.

Such transfer of securities from AFS/HFT category to HTM category is to be made at the lower of the book value or market value (calculated as of July 15, 2013).

Besides, the central bank has also allowed the banks to spread over the MTM (mark to market) losses on the remaining AFS/HFT book over the next three quarters equally. It also plans to conduct open market purchase operations (OMOs) of long dated Government of India Securities of Rs 8,000 crore on August 23.

Banking stocks have been battered badly in the recent carnage. While the benchmark indices – the S&P BSE Sensex and the CNX Nifty lost nearly 6% each between 14 – 20 August, the banking index, S&P BSE Bankex shed over 8%.

However, the stocks have gained ground on Wednesday with the S&P BSE Bankex rallying over 5%, or 546 points, as compared to 1% or 187 point rise in benchmark S&P BSE Sensex. YES Bank, IndusInd Bank, Oriental Bank of Commerce, Canara Bank, Union Bank of India, Punjab National Bank, Dena Bank, Axis Bank and Bank of India has rallied more than 7% each on the Bombay Stock Exchange (BSE).

So, what should you do with these stocks now? Is the rally here to stay or should you use the upside to exit?

“Though we believe these measures are only sentimentally positive for the banks, other basic fundamental negatives remain largely unchanged except for the RBI intention to not let long-term yields go too high,” point out analysts at Angel Broking.

“RBI’s move is positive for banks which would have faced MTM losses due to spike in bond yields. OMO operation will also ease pressure on tight liquidity. Banking stocks are a buy at these levels and once the central bank removes MSF, then private banks can see big rally,” said A K Prabhakar, senior VP (retail research), Anand Rathi Financial Services.

“YES Bank, IndusInd Bank, ICICI Bank, Canara Bank and Dena Bank are good bets at the current levels,” he adds.

Chandan Taparia, derivative analyst at Anand Rathi, however, maintains a cautious view. “It seems that the immediate bottom has formed. After the RBI’s measure, banks are witnessing short covering. One should wait for some time before taking the plunge.”

“Valuations for PSU banks have come off by a big margin post the 30-50% correction in the last three months. We remain positive on ICICI Bank, Axis Bank but near term sectoral headwinds continue to remain. We remain cautious on PSU banks with a Neutral rating on all coverage PSUs. With tighter liquidity, we prefer NBFCs with some pricing power where MMFS is best placed but we will wait for better valuations,” point out Adarsh Parasrampuria and Pritesh Bumb of Prabhudas Lilladher in 19 August report.