Bank shares close lower after RBI hikes cash reserve ratio

Bank of Baroda, Punjab National Bank, Bank of India and State Bank of India lost over 2%


Banking shares tumbled, with State Bank of India closed down 2.82%. Photo: Mint
Banking shares tumbled, with State Bank of India closed down 2.82%. Photo: Mint

Mumbai: Shares of banking stocks on Monday fell after the Reserve Bank of India (RBI) ordered banks to deposit extra cash with it. The move came in order to absorb over Rs5 trillion excess liquidity generated by the banks due to the government’s demonetisation scheme to curb black money and circulation of fake currency.

On Saturday, the RBI said that the banks need to transfer 100% of their cash under its cash reserve ratio (CRR) from deposits generated between 16 September to 11 November. The RBI also said these measures will be temporary and will be reviewed on or before 9 December.

Analysts at rating firm Jefferies expect that the move to park additional amount with the RBI is without interest, while deposits do carry a cost for the bank. So, the expectation of improvement in NIM (net interest margin) for the quarter for public sector banks is at risk now.

Bank of Baroda fell 2.92%, Punjab National Bank fell 2.25%, Bank of India fell 2.72%, State Bank of India fell 2.82%, Union Bank of India declined 2.06%, Corporation Bank declined 1.54%, and Federal Bank fell 1.13%.

“This directive could cause up to 10 basis points impact (negative carry) on pre-tax ROA and limit bond gains for banks. Demonetisation is already expected to hurt loan growth and asset quality of banks in FY17 and FY18,” Broking firm Ambit Capital said in a report released to its investors on Monday. One basis point is one-hundredth of a percentage point.

“The RBI’s move would compound the impact of demonetisation on banks’ profitability in FY17/18. We would have to significantly decrease our FY17/18 earnings estimates. Hence, we have put the estimates, target prices and recommendations of our bank stocks under review,” the report added.

The 10-year bond yield gained for the second consecutive session. It was trading at 6.30%, up 7 basis points from its previous close of 6.233%.

Edelweiss Securities expected that the impact of quarterly profit does not take into account notional marked-to-market losses on the bond portfolio due to the likely rise in government bond yield due to the incremental CRR decision by the RBI.

“The notional losses on the bond portfolio will be a much higher percentage of quarterly profit and we, instead, look at the impact on networth. The impact on networth is also a proxy for theoretical stock price correction,” Edelweiss Securities added.

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