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PSUs lead as bank stocks come alive

the nationalised bank stocks close at 4% high

Apnaloan.com Research Bureau

10 Aug 2007

The forsaken banking shares led the charge on Tuesday powering the benchmark indices beyond the psychological 14000 barrier. The Bankex closed 4% higher during the day. The RBI's decision to leave key rates unchanged led to a rally in oversold banking stocks.


PSU banks were the strongest gainers during the day as they were the worst hit on interest rate concerns. Leading the pack was Canara Bank, which gained nearly 10% followed by Oriental Bank at 8% and SBI at 7%. Private sector banks too ended higher but couldn't keep pace with their PSU peers. According to Ravikant Bhat, analyst at IDBI Capital, there has always been a negative correlation between banking scrips and interest rate moves by the central bank. With the market being jittery about yet another hike, most bank stocks had been oversold leading to Tuesday's rally.


Banks, especially the PSU's, had seen a larger sell-off mainly on account of margin pressure and investment losses on bond portfolios from higher interest rates. This partly explains the sharp gains posted by both Canara Bank and Oriental Bank of Commerce as they have large amount of investments outstanding in their AFS (available for sale) category.


Portfolios under AFS would need to be mark to market and losses get set against the P&L. Further increases in interest rates would have meant a rise in bond yields and subsequent losses to the portfolio for these banks. Moreover, PSU banks are more susceptible to margin pressure emanating from higher interest rates because of low-cost deposits and partial pass through of funding costs. Most private banks have been much more aggressive in passing on increased funding costs to borrowers.


Some dealers also added that the rally in banks was further strengthened by short covering in the derivatives segment. Vikas Khemani, head of equities at Edelweiss Capital, is of the view that short covering, combined with a reversal in sentiment towards banking scrips, led to strong buying in oversold counters.


The policy has also proposed reducing the risk weights on housing loans below Rs 20 lacs from 0.75 to 0.50. The move is widely expected to provide capital relief for banks especially for those with large mortgage portfolios. However, borrowers might have to wait a little longer before they see a reduction in rates.


According to Vishaka Mulye, CFO, ICICI Bank, There are essentially three components to a banks funding costs which includes deposit costs, operating expenses and capital exposures. While there has been relief on capital component, interest costs for borrowers would be dependent upon further direction of interest rates.

For banks, it has been a relief rally after being on the wrong side of most investors. Further upsides in banks would be dependent on the path that interest rates take from here.

(Courtesy: Economic Times)

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