Bank stocks hit as margins under pressure

Written by Markets Bureau | Mumbai, Oct 30 | Updated: Oct 31 2007, 06:21am hrs
Banking sector stocks took a beating on Tuesday after the Reserve Bank of India hiked cash reserve ratio (CRR) by 50 basis points to 7.5% in a bid to drain out liquidity infused by foreign institutional investors (FIIs).

Though experts feel that this hike was more or less on expected lines, banking sector stocks fell between 1%-5% soon after the announcement. The BSE Bankex closed at 10,550.09 points, down 99.62 points or 0.94% .

According to Tushar Poddar, vice-president, Goldman Sachs, the CRR hike will squeeze liquidity to the tune of Rs 16,000 crore ($4 billion) from the system. Consensus was not expecting a CRR hike, likely to be seen as marginally negative in the near-term for markets, especially banks.

Banks are unlikely to change deposit or lending rates as a result of this move. With credit growth slowing to 23.3% in the fortnight ending October 12, and banks flush with liquidity, a case could be made for cutting deposit and lending rates, but with banks required to hold a further 0.5% of deposits at the central bank, we do not expect them to do so in the near-term, he said.

The stock of Punjab National Bank (PNB) was hit hardest as the share price fell by 5.25% or Rs 28.30 to close at Rs 510.85. Kotak Mahindra Bank was next in queue as it fell by 2.75% or Rs 28.65 to close at Rs 1,012.55. Even public sector major State Bank of India (SBI) slid by 2.63% or Rs 55.65 to close at Rs 2,062.20.

Interestingly, some banks in the BSE Bankex bucked the trend. The shares of Bank of India rose by around 18% or Rs 57 to close at Rs 372.60 and Union Bank of India also ended the day on a high, gaining 8.07% or Rs 13 to close at Rs 174.05. The breadth of BSE Bankex was also weak as against 12 declines there were only 6 advances.

Fund managers said the CRR hike will impact banks' net interest margins (NIM) by around 3-4 bps. Ritesh Jain, fund manager - fixed income, Principal PNB MF, said: The system will take a hit of around Rs 13,000 Rs 14,000 crore, which is anyway there in the system. The impact on banks' net interest margins will be around 3-4 basis points.