There are a couple of reasons for the sharp fall in bank stocks on Monday. The first, of course, is that hopes of a rate cut were dashed. These hopes had been built into prices over the past fortnight after a string of depressed economic data and an off-hand comment from a central bank deputy governor.
Second, and what’s probably worse, is that the Reserve Bank of India (RBI) has kicked the policy ball to the government. It seems to suggest further that rate-cut action might be contingent on tighter fiscal policy and reining in fuel subsidies. That has prompted some economists to reduce their rate cut forecasts for this fiscal and, thus, banks’ earnings downgrades may not be far behind.
Brokerages, and even banks in their earnings guidance, had expected the cost of funds to improve over the next couple of quarters. Not only that, a cut in interest rates might have propped up credit growth. Forget investment demand—the story of falling new project sanctions is old wine now—even consumer demand for credit is in danger as the fall in, say, car sales show.
Secondly, with economic growth slowing and interest rates staying where they are, the spectre of stressed assets remains, despite many banks showing a quarter-on-quarter drop in non-performing loans in the three months ended March. One key reason for the decline was that many loans were shoved to the restructured assets category; nearly Rs 40,000 crore were added in fiscal 2012.
According to Barclays, the pipeline of assets awaiting restructuring under the corporate debt restructuring process stands at Rs 35,100 crore. The brokerage estimates Rs 28,000 crore will be added, assuming an 80% approval rate. The number could be far higher as new loans are added to the pipeline this year.
Thirdly, with bond yields likely to remain at this level, or even surge, as a profligate government borrows more from the market, banks will also suffer from mark-to-market losses.
Needless to say, the net result is falling profits and squeezed margins. The move to increase the limit on export credit financing is not much of a consolation prize either. It talks about rupee financing, which is costlier than foreign currency funds and, therefore, will find fewer takers. At best, it will help larger banks such as State Bank of India that have some credit portfolio in this segment.
Nevertheless, while the BSE Bankex took a tumble on Monday, it’s still higher than where it was at the beginning of the month. That opens the possibility of a further decline.