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Praveen Gurwani
MUMBAI: The Reserve Bank of India’s move late on Friday to increase the cash reserve ratio of banks, unleashed a wave of selling fury in the sector on Monday, leaving investors poorer by more than Rs 21,000 crore.
The pack led by SBI, ICICI Bank and HDFC Bank took major beating amid the 400-point crash in the 30-share Sensex, plunging between 4.7% and 8.2% on concerns that their earnings could be affected by the RBI move. The CRR will be raised by 50 basis points in two phases — 25 basis points each on December 23, 2006 and January 6, 2007.
BSE’s Bankex, an index which tracks movement in all the listed banks, was the biggest loser among the 11 sectoral indices. It tanked 464 points, or 6.4%, to close at 6,750, which is the biggest fall in absolute terms and the fourth -biggest fall in percentage terms. “While we expected the RBI to increase the benchmark reverse repo rate at or before its next quarterly review of monetary policy, the move to hike the CRR was contrary to expectations. We expect the move to increase the cost of funding for the banking system and consequently result in increase in interest rates,” said an analyst with Emkay Share and Stock Brokers.
Among heavyweights, SBI, the country’s leading commercial bank, bore the brunt of the selling pressure, falling 8.2% to Rs 1,243. Leading private sector banks ICICI Bank and HDFC Bank slipped 6.5% and 4.7%, respectively, to Rs 819 and Rs 1,034. Bank of India also figured among the prominent losers, ending 10% down at Rs 184. Bank of Baroda, PNB, Canara Bank, Federal Bank and Indian Overseas Bank also lost sharply between 7.4% and 8.5%.
Reacting to the RBI move, Vishakha Mulye, CFO, ICICI Bank, said the bank would examine further rate hikes once it fully estimates the impact of the hike in CRR.
For banks a higher CRR requirement would imply an increase in the non-interest earning assets, which will have a negative impact on margins, say analysts, adding, impact on margins could vary from bank to bank depending on their cost of funds.
Overall, ETIG estimates that the margin erosion should be in the region of three to five basis points. More than margins, it cuts off resources that would otherwise be available for lending. This could sprinkle down in the form of higher deposit costs as resources become harder to mobilise. Banks would also be impacted in the form of a reduction in their net interest income (NII) though impact on margins and balance sheet would be marginal.
NII could be hit significantly. Moreover, for banks, it also implies higher opportunity losses as they loose out on yields which these funds could have otherwise earned. However, some analysts see today’s weakness in key banking stocks as an opportunity. Brokerage house Kotak Securities has retained its bullish call on state-owned banks.
“on the back of a regime switch to stable government securities (g-sec) yields and firm lending rates.“While the increase in CRR will likely impact bank earnings adversely, the increase in lending rates could offset such decline. We do not expect any impact of the g-sec yields on banking sector earnings, as a large part of banks’ investment portfolio had already been mark-to-market at an effective yield of 7.67%,” the Kotak note to clients said
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