Govt risk haunts bank stocks

Govt risk haunts bank stocks
Comment E-mail Print Share
First Published: Wed, Feb 27 2008. 10 53 PM IST

Updated: Wed, Feb 27 2008. 10 53 PM IST
Banking stocks have underperformed the Sensex this month. While the current Sensex level is around the same as at the beginning of February, the BSE Bankex is down 6.5%. Taken from their all-time highs, the Sensex is down 16%, while the Bankex is lower by 20%. Clearly, the “moral suasion” by the Reserve Bank of India (RBI) and the government, that has forced some banks to reduce their lending rates, hasn’t gone down too well with investors. There are also concerns about what the Union Budget will bring, since the government may be tempted to use the banks as an instrument in fulfilling its political agenda. In other words, loan write-offs and more directed lending loom darkly on the banking horizon.
Banks’ bread-and-butter lending business is affected by lower interest rates because while the lower rates apply to all loans, lower deposit rates are applicable only to fresh deposits. That’s apart from the fact that many banks have had to cut lending rates without being able to reduce deposit rates, because of the tight conditions in the money market. Bank margins will therefore be under pressure this quarter, the mitigating factor being that some banks will repay more of their high-cost deposits raised earlier. But the quarter may not see the same Treasury gains seen during September-December.
Between 28 December and 1 February, bank investments in government and other approved securities went up by Rs2,7051 crore—these had risen by Rs15,592 crore in the three-month period between 28 September and 28 December. That’s an indication that credit hasn’t picked up and banks have been parking their money in government bonds. While the lower lending rates will increase credit, it remains to be seen whether that will offset the pressure on margins.
Looking ahead, banks are likely to see a pick-up in lending if the stock market continues to be depressed and if risk aversion remains high—these factors could lead to a return of corporates to the domestic banking sector for funds.
If foreign fund inflows continue to be scant and if RBI doesn’t feel it necessary to intervene in the forex market, that could lead to banks scrambling for funds. In that situation, the government banks that have been forced to lower rates could be affected. Like cement and steel companies, government risk is haunting banks.
Gold to remain a safe haven for some more time
Record gold prices have led to a decline in purchases in India, the world’s largest market, but the uncertainty in the global financial markets and the sharp decline in the dollar have led to a sharp rise in the price of the yellow metal. The markets even shrugged off news that the International Monetary Fund could sell 400 tonnes, which is more than 10% of the annual global demand for the metal, to shore up its financial condition.
Debjyoti Chatterjee, head of research at Mape Admisi Commodities Pvt. Ltd, says physical purchases of jewellery, coins and bars have been declining since November when prices shot up to around Rs10,000 for every 10g. Currently, prices are at Rs12,250 and purchases are continuing to decline. India accounts for 22% of world demand, and while end-users in this market may be postponing purchases, a number of other buyers have cropped up. Primary among them are institutional buyers, who have witnessed increasing inflows owing to the dollar decline. The chart alo-ngside shows how the rise in gold prices has coincided with the fall in dollar’s value.
There are a number of other factors that are pushing prices higher. Gold production has been on the decline and recent mining problems in South Africa have accentuated supply problems. The success of gold exchange-traded funds in the US has led to large purchases by these funds, further reducing supply for genuine buyers.
Yet, the drop in purchases and/or increase in sales in key markets such as India and Dubai is cause for concern. What’s propping up gold prices currently is a low dollar and surging crude pri-ces. And with inflation running rampant across the wor-ld and with unprecedented problems in the global financial markets, gold’s status as a safe haven looks likely to continue for some time.
Write to us at marktomarket@livemint.com
Comment E-mail Print Share
First Published: Wed, Feb 27 2008. 10 53 PM IST