Banking stocks end in red as hopes of further rate cuts by RBI fade

MUMBAI: Banking stocks tumbled on Tuesday, posting one of their biggest single-day declines so far in 2015, after the Reserve Bank of India’s hawkish outlook on interest rates. Analysts said the outlook for bank stocks over the next three months remains uncertain as a slowing economy may continue to hurt profitability and increase bad loans. Investors may continue to prefer private banks like Axis Bank, Yes Bank, ICICI Bank and HDFC Bank over their public sector peers.

The BSE Bankex dropped 3.46 per cent with public sector banks such as Union Bank, Oriental Bank, Allahabad Bank, Andhra Bank and Uco Bank falling between 5 per cent and 8 per cent. Private lenders such as Axis Bank, IndusInd Bank, Yes Bank and ICICI Bank fell about 4 per cent each.

“Despite PSU bank valuations at pre-2014 election lows, we continue to prefer private banks given their superior growth and earnings visibility,” said Suresh Ganapathy, analyst at Macquarie Capital Securities India. “We expect the valuation gap between public and private to persist.” Ganapthy’s top banking stock picks are Axis Bank, Yes Bank and HDFC Bank.




More than half of the 39 listed banking stocks have fallen between 20 per cent and 50 per cent in the past one year as against the 18 per cent rise in the BSE Bankex. The Sensex has gained 9.37 per cent during this period.

Vaibhav Agrawal, banking analyst at Angel Broking, said the government’s revised stance to provide capital only to banks meeting profitability criteria will hurt public sector banks. He is bullish on Axis Bank, Yes Bank and ICICI Bank.

Among the large private banks, Kotak Mahindra has gained 57 per cent in the past one year while Yes Bank and Axis Bank have surge 52 per cent each. The other two large private banks HDFC and ICICI have risen 26 per cent and 8 per cent, respectively.

Private banks have largely sustained their growth during quarter ended March 2015 despite overall loan growth remaining slow. All banks except ICICI reported growth of over 20 per cent in the quarter.




“We believe that growth for private banks will remain robust, margins stable, better fees and costs, but credit costs may increase and remain elevated at least in FY16” said Manish Karwa, analyst at Deutsche Bank. Among public sector banks, Bank of India shares have fallen 39 per cent in the last one year while Canara Bank and Punjab National Bank shares have declined 22 per cent each. Among the big two PSU banks, Bank of Baroda declined 5 per cent while State Bank of India gained 5 per cent in the past one year.

But, some analysts believe the downside in shares of public sector banks could be limited.

“Strengthened liability franchise, government support and curtailed opex in conjunction with tailwinds of gradual macro improvement and attractive current valuations, imply limited downside for large PSU banks,” said Nilesh Parikh, analyst, Edelwiess, who prefers SBI, BoB and PNB.

Dhiraj Sachdev, senior vice president at HSBC Global Asset Management, said, “We hope the negative asset quality of the public sector banks will bottom out sooner with their discount to private banks set to reduce in the coming years as the economy grows.