Till a few months ago, cries of ‘Bank Nifty, Bank Nifty’ rent the air in broking offices.
Interest perked up on banking counters from investors and on Bank Nifty from traders after P. Chidambaram took over as Finance Minister last year on August 1.
Known for taking tough and bold decisions, stock-market-friendly Chidambaram assumed office at a time when the country’s economic growth had slipped to a nine-year low of 6.5 per cent during 2011-12 and there was an urgent need to restore confidence of foreign and domestic investors.
There was an air of optimism on the sector then as investors believed that Chidambaram would be able to turn the tide for banks, which suffered under slow-growth environment and weakening corporate credit profiles besides rising non-performing assets.
On these expectations, bank stocks performed well at the bourses. Many stocks, including those from the PSU universe, had hit their 52-week highs in January. In fact, Bank Nifty derivatives witnessed a record turnover of Rs 27,165 crore on January 29.
But hopes turned into despair as the situation on the ground did not improve. In fact, things just got worse for the sector. The Bank Nifty is now down about 25 per cent from its 52-week high registered in January.
The rupee depreciated over 12 per cent in the last two months. For the first time, it slipped below 61. This has put both the Government and the RBI in a tight spot. The Reserve Bank of India, on its part, has tightened liquidity in an effort to arrest rupee slide.
All these factors have aggravated the pain for banking stocks.
Global broking major Espirito Santo said historical evidence from 1997-98 suggests that such monetary policy help stem the rupee’s slump. “But once the policy is reversed we think the rupee will again start depreciating.Unless the Government steps up to the plate and passes the much needed reforms, we may even see the RBI formally raising rates to shore up the rupee,” it warned.
State-owned banks that have declared their earnings so far have seen their total net NPAs jumping close to 50 per cent year-on-year. The number is quite high given that the net NPA of banks rose 51 per cent in 2012-13 to Rs 92,825 crore over the previous year.
Most banks, particularly public sector ones, have either shown a dip or only a modest rise in first quarter profit due to the sharp rise in stress loans.
According to analysts, using PSU banks for social lending rather than economic interests was one of the major reasons for deterioration of their health.
Bank stocks are falling on concerns that their cost of funds will continue to rise as the RBI may not be able to lower rates.
“Risk-reward for rate-sensitive sectors such as banks and real estate looks less attractive given cyclical pressures from rising rates, tighter liquidity and slower domestic growth,” said Goldman Sachs, in its recent report that downgraded India from neutral to underweight.
So those who want to invest in bank stocks now because of the dip in prices can put off their plans for now.