Banking stocks on Tuesday fell for a second straight day on fears that hike in deposit rates will hurt profitability. The BSE Bankex was down 2.86% on Tuesday. The gauge, which comprises 14 bank stocks, is down by about 6% in the past two days against 0.16% decline in Sensex.

State Bank of India (SBI) fell almost 3% on Tuesday, extending a 4% decline from a day earlier, after it raised its deposit rates by 50 to 150 basis points. ICICI Bank, which on Saturday raised deposit rates by 25 to 50 basis points and loan rates by 50 basis points, fell 3.5%. Analysts are expecting other banks to follow suit in the coming days. They are of the view that current net interest margins (NIM) at banks are unsustainable and expect pressure on profitability over the next few quarters, resulting in some volatility in the stock prices. Reserve Bank of India governor D Subbarao last week urged lenders to increase deposit rates and lower the lending interest to help the economy grow faster.

The worst performers on the Bankex were Bank of India and Union Bank of India which have fallen 8.3% and 7.6%, respectively, since Monday. Deposit rates have gone up 50-250 basis points in the past three months, while lending rates rose by 50-75 basis points. ?The clear asymmetric rate increases that banks are witnessing are bound to exert pressure on margins, particularly for PSU banks,? Suresh Ganapathy of Macquarie in a research note.

Macquarie is cautious on the banking sector with relative preference for private sector banks over PSU banks. ?We expect earnings downgrades in the near term for PSU banks due to margin pressure and higher opex arising out of pensions,? it stated. The brokerage has a sell rating on SBI, Union Bank and Canara Bank.

?Over the five quarters, NIMs have expanded by 75 bps on the back of deposit cost moderation. With investment and lending yields not keeping pace with the deposit rate increases, we expect NIM to contract by 40 bps over next few quarters,? said Ashish Gupta of Credit Suisse in a note. Credit Suisse too has a underperform rating on SBI.