Bank scrips remain good picks for the long term

Banking stocks, darlings of equity investors not so long ago, are facing serious pressures for the time being.

High interest rates and inflation, plus a likely slowdown in economic growth, has caused the stocks to head south, after witnessing unprecedented growth in the last couple of years.

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The 17-share BSE Bankex, the benchmark for banking stocks, has fallen 21.05% in the last one month, against a 15.27% decline in the benchmark 30-share main index, or Sensex, in the same period. The banking sector is the third-biggest loser, after the realty and power sectors.

The end result is that analysts, who have rated banking stocks a 'buy' for some time now, are busy downgrading the same and trimming their projections.

Analysts say that besides inflation and interest rates, other negatives are also back into focus. Jyoti Khatri, banking analyst at K R Choksi, says grey areas like the implementation of Basel II norms and reimbursement of the farm loan waivers are clouding the banking horizon right now.

"Rates are hardening, but there are also other factors... We just had a word with State Bank of India, and they were not sure whether the reimbursement of the loan waiver is going to be in cash or bonds. So there is a lot of ambiguity which, is adding to the negative factors," Khatri told DNA Money.

Indian banks with foreign branches and foreign banks in India have already migrated to the Basel II requirements of capital adequacy.

But this year, banks will have to report capital adequacy in both, Basel I and Basel II formats, to make a better assessment of the new norms, Khatri said.

On Tuesday, a French brokerage in India downgraded the banking sector to neutral citing rising inflation, declining liquidity and rising interest rates.

"Key risks to earnings remain for high P/E private banks led by ICICI Bank, HDFC Bank, Axis Bank, Bank of Rajasthan, Bank of India, Bank of Baroda, State Bank India and Punjab National Bank," a report from the brokerage said.

Higher interest rates will also hit credit demand, and banks won't be able to lend at the pace seen the last few years, hitting earnings further.

Also, higher borrowing rates could make loans already taken difficult to repay, increasing the chances of defaults.

"Credit quality and asset class will be impacted. Banks will also face mark-to-market treasury losses because of rising yields," said Siddharth Teli, banking analyst with ICICI Securities.

Teli says he sees 'no visible catalyst' for a turnaround in the downward spiral for the time being, "unless oil prices come down from their current high levels."

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