Meltdown in bank stocks

THE COMPASS

Bank stocks in other Asian markets too saw a sell as concerns deepened that troubles in the US financial markets would spill over to Asia. Japanese banks, in particular tanked with three large banks losing between 6-8 per cent. Taiwan's financial sub index fell nearly 6 per cent to its lowest level since October 2005.

The slide in the Indian market was led by an 11 per cent fall in HDFC Bank and a near 9 per cent fall in ICICI Bank. Bank stocks have already fallen by 50-60 per cent since January but the could lose some more ground .That's because the central bank is likely to tighten money further; in late June, the Reserve Bank increased the repo rate and the cash reserve ratio by 50 basis points each.

A further hike in rates is possible at the end of July because inflation has gone up since last month. That will push up the cost of funds for banks and could prompt them to increase lending rates further than they already have. Unless they increase lending rates, their net interest margins will be under pressure because the yields on reserves are zero and the higher repo rate pushes up funding costs incrementally.

Besides, in a high interest rate scenario customers both companies and individuals are likely to borrow less which means that banks will end up having lent lower amounts; industry watchers believe that loan growth could taper off from the current levels of 24 per cent. Already, some of this growth in bank credit is due to more loans given to oil companies because the price of oil has risen so sharply.

More important, the quality of loans, which is already seeing some stress, could deteriorate further because the weaker environment will hurt profits of companies, mainly smaller firms and also strain the finances of individuals.

State Bank indicated that it was seeing some problems with its SME quarter in the March quarter, ICICI Bank too is believed to be seeing some rise in delinquencies while Axis Bank reported sequentially higher non-performing loans for the June quarter. Bank stocks may appear very cheap with many of them trading close to or below book value but the environment remains challenging.