Mumbai: The banking crisis spread to Europe from the US and pulled down India’s bellwether stock index, the Sensex, to its lowest this year in mid-day trades — to just past 12,400 points.
Belgian-Dutch group Fortis NV, the first big casuality outside the US, was rescued by three European governments that spent more than $16 billion (Rs75,040 crore), while the UK lender Bradford and Bingley Plc. was nationalized.
Also See New Beginning? (Graphic)
“The weaker links in European banking are being exposed,” said Mamoun Tazi, a London-based financial sector analyst at MF Global Ltd, the brokerage arm of Man Group Plc., in a telephone interview.
Global equity analysts expect more bad news from a few other banks and financial institutions in Europe and other parts of the world, with “many going bust as the current economic cycle plays through”.
Most big European banks have large exposure to Indian equities through their various arms, registered as foreign institutional investors (FIIs) in India.
FIIs have already sold some $9.2 billion worth of Indian stocks, net of purchases, and several local brokers expect this to climb up to around $12 billion by the end of this year. Last year, FIIs bought Indian stocks worth $17.36 billion, net of sales—the highest in a year since India opened its doors for foreign investors in 1993.
“Once again everybody is unsure about the end and depth of this crisis,” said Anil Advani, head of equity research at SBICap Securities Ltd, the brokerage arm of India’s largest lender.
On Monday, the Sensex recovered around 200 points to close at 12,595.75, down 3.9%, or about 500 points. The National Stock Exchange’s 50-stock Nifty index closed at 3,850.05, down 3.4%, or 135.20 points.
The sell-off in the equity markets had its impact on the currency market too, with FIIs converting their rupee exposure to dollars after selling stocks. The local currency touched 47.12 to the dollar, its lowest since 2 June 2003, in intra-day trade before aggressive intervention by the Reserve Bank of India (RBI) pushed the rupee to 46.97 to the dollar.
According to foreign exchange dealers, RBI was active in the market, selling dollars throughout the day, which were mopped up by refiners and other importers quickly to cover their short positions.
“We continue to expect the rupee to trade in the Rs45-47 range in the next few months,” said Rohini Malkani, economist for Citigroup India.
The short-term outlook for equities, however, remains strongly bearish, according to most analysts and some expect the Sensex to slip to 11,000 levels in October.
While the turmoil in the financial markets remains unabated, two pieces of India-specific positive news are: earlier-than-expected production of crude from the KG basin and the US House of Representatives voting 298-117 in favour of the nuclear deal, according to Malkani of Citigroup.
The Sensex is now down about 38% this year. “The worst of everything, everywhere in global markets is being factored in local stock valuations,” said SBI’s Advani.
The price to earnings per share multiple, or PE multiple, of the Sensex, which was 27.67 at the beginning of the year, has now come down to 15.83, but not everybody is convinced that Indian stocks have become cheap.
The higher counterparty risk that has gripped the global banking system — leading to banks refusing to lend to companies and to each other — may soon manifest itself in India, market analysts said.
A 26 September research report on Indian banks by Goldman Sachs Group Inc. said it expects significant rise in non-performing loans (NPLs) from corporations, and small and medium enterprises, a trend that reverberates across Asia with similar concerns in Korea, Taiwan, Hong Kong and China markets.
“We expect implied NPL ratio on all corporate lending to double to 7.8% from 3.9%,” the Goldman report said.
Bank stocks were hit the most on Monday. The shares of India’s largest private sector lender ICICI Bank Ltd dropped more than 12%. Among the Sensex stocks, Hindustan Unilever Ltd was the only gainer. Similarly, among sector indices, the Bankex, the index of the banking sector, lost the maximum.
The Bankex has lost close to 46% since the beginning of the year, more than the Sensex. The most affected sector, however, is the realty sector and its representative index has lost more than 73%.
Experts, however, said there was no systemic crisis in India. “We will see the impact of the crisis in the US and Europe, but Indian banks are safe and they have enough capital to withstand any pressure that may arise out of their limited exposure to some of the global players, which are crumbling,” said a senior banker, who does not wish to be named.
The new European victims surfaced even as global investors remain largely uncertain about the US government’s $700 billion bailout package.
On Monday, Citigroup Inc. agreed to acquire bulk of the assets and liabilities of troubled lender Wachovia Corp., assisted by the US Federal Deposit Insurance Corp.
With continuing deterioration in the global economic environment, more European banks could probably collapse, said Tazi of MF Global.
On Monday, the Dow Jones Industrial Average was down 300 points in early trading. At 8.45pm India time, it was trading at 10,862.50, 2.52% down.
Ashwin Ramarathinam and Anup Roy contributed to this story.