NEW DELHI: The banking counter took a hit on Monday, with the PSU banking shares falling up to 4 per cent in early trade after the Reserve Bank of India (RBI) on Saturday announced measures to suck out additional liquidity from the system.
The central bank, over the weekend, asked banks to keep all the deposits they received between September 16 and November 11 as cash reserve requirement. The move has come amid rising trend of banks parking excess liquidity with RBI after the government’s demonetisation move.
While credit offtake was expected to remain weak in the near future, investors were seen taking heart from the fact that banks would enjoy lower cost of funding and lock the excess liquidity with the apex bank at a reverse repo rate of 5.75 per cent.
But with RBI announcing higher CRR limit, banks have to compulsorily park deposits with the central bank without any interest. This has made many brokerages turn cautious on the banking space, especially the PSU banks.
The new CRR requirement may also limit banks’ ability to pass on easy interest rates.
Goldman Sachs (GS) in a note said banks might need to raise lending rates to offset the impact of higher CRR, which looks less probable given the sluggish demand.
GS believes the move may impact state-run lenders the most. It projects net interest margins (NIMs) of lenders to drop by an additional 12 basis points.
“The move is incrementally negative for the system, as it would have an impact on profitability,” the brokerage said, adding that “banks will need to revisit their deposit rates aggressively.”
Citi in another note said the liquidity in the banking system would remain in surplus even after this measure.
“However for a brief period the banking system will need to borrow from repo/term repo window, since a large part of the surplus liquidity in the banking system (Rs 3,50,000 lakh crore) is trapped in longer-term reverse repos.”
CLSA said the hike in CRR will be a short-term overhang for the banking and NBFC stocks.
“It will limit gains from easy liquidity in H2 of FY17,” it said, adding that the move “will add to pressure faced from slower business activity.”
Banks will now have to factor in this while making cuts to MCLR/retail-term deposit rates, it said.
BofA-ML said it would prefer to stay with stronger deposit franchise and well-capitalised banks such as HDFC Bank and Kotak Mahindra Bank.
It would also prefer to stay with growth-oriented and low-asset quality issue banks such as Yes bank. Among PSBs, it likes SBI and Bank of Baroda.
Over the past two weeks, PSU banks have outperformed the market after having received a higher share of deposits, but expectations of improvement in their NIMs are at risk, Jefferies said. This brokerage prefers ICICI Bank, SBI and HDFC Bank.
Credit Suisse is advising investors to avoid PSU banks and Yes Bank.
“The RBI liquidity measures will put further pressure on banks’ earnings. Faster growing banks such as Yes Bank and IndusInd Bank would see relatively larger impact,” it said.
Nomura India said it did not see any reason to turn negative on banks beyond the initial negative reaction.
Major banking stocks, which were down up to 4 per cent in early trade, recovered some ground as the session progressed. At 9.36 am, the BSE Bankex was trading 1.37 per cent lower at 20,894.55. Bank of Baroda, SBI and PNB, were the worst index performers, falling up to 3 per cent.
Source: Economic Times