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Bank stocks tank as RBI rate cut triggers margin woes

Analysts tracking the sector said while a downward revision in GDP estimates hurt broader market sentiment, banking stocks were hit as quicker transmission of the rate cut by banks may lead to margin loss in coming quarters

Aprajita Sharma       Last Updated: October 4, 2019  | 21:52 IST
Bank stocks tank as RBI rate cut triggers margin woes
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Rate-sensitive banking and financial stocks took a beating on Friday after the Reserve Bank of India (RBI), in line with market expectations, cut the short-term lending rate by 25 basis points to 5.15 per cent.  With this, the cumulative rate cut stands at 135 basis points so far this year.

Analysts tracking the sector said while a downward revision in GDP estimates hurt broader market sentiment, banking stocks were hit as quicker transmission of the rate cut by banks may lead to margin loss in coming quarters. The fifth straight rate cut, they said, may help revive demand this festive season.  

On the BSE, 26 of 39 banking stocks ended lower. DCB Bank, Federal Bank, Kotak Mahindra Bank and ICICI Bank were the worst hit, falling 3-4 per cent. "RBI's focus on quick transmission of lower interest rates would put pressure on margins of banks. Given the domestic slowdown and global uncertainties it would be wise to be very selective in stock picking at the current juncture," said Gaurav Dua, senior vice president and head of capital market strategy and investments at Sharekhan.

From the day's high of 28,730.30, the Nifty Bank index slipped 1000 points to 27,730.80, a 2.4 per cent drop or 683 points from the previous close. By comparison, the benchmark Nifty fell 1.3 per cent.

Margin outlook

Ravikant Bhat, senior analyst - banking at IndiaNivesh Securities said, "We don't have an estimate on margin pressure following the new benchmarking rules. But, banks may eventually benefit if rate cycle reaches a trough after another 25-50bps." He further stated that typically new benchmarks take up to two years to get implemented across most lending relationships, hence the hit may not be as severe as is being thought.

Siddharth Purohit, senior banking analyst at SMC Global Securities while points out that banking and NBFC stocks will remain under pressure for the rest of the financial year, he doesn't expect  much impact on NIM. "NIMs will get impacted marginally but eventually deposits rates will also come down and hence major decline in NIM is unlikely."

Notably, the RBI has mandated banks to link their floating loan rates to one of the external benchmarks published by Financial Benchmarks India Private Ltd (FBIL) - repo rate, treasury bills etc - from October 1.

The central bank in its policy statement noted that "monetary transmission has remained staggered and incomplete".  "As against the cumulative policy repo rate reduction of 110bps during February-August 2019, the weighted average lending rate on fresh rupee loans of commercial banks declined by 29 basis points."

Sonal Varma, Chief India Economist at Nomura feels that considering the weaker-than-expected growth outlook, a front-loaded policy action would have been the right approach. "It would have enabled banks to sharply lower their lending rates ahead of the upcoming festive season," she says.

Meanwhile, with earnings season for the September quarter just round the corner, Centrum Broking in its banking preview report estimated banks to report an improvement in margins on quarterly and yearly basis. However, it advised to be watchful of commentaries on growth, margins and NPA resolutions.

"We expect banks under our coverage to report moderate loan growth (+13.6 per cent YoY), leading to an uptick in both QoQ and YoY NIM. Pre-provision operating profits could grow +10.9 per cent YoY. On a YoY basis, credit costs are likely to drop 13.1 per cent (led by SBI, ICICI and Federal Bank) which would translate to healthy growth in the overall YoY PAT," the report said.

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