The Reserve Bank’s move to increase the repo rate by 25 basis points to 7.75 per cent and the Cash Reserve Ratio (CRR) by 0.5 per cent to 6.50 per cent saw banking stocks leading the recent fall in Sensex. Over the past two months since February 8, the banking index, BSE Bankex, has fallen by 17.6 per cent against 12 per cent fall in the Sensex. Rising interest rates have been the reason for this fall and they have been instrumental for the sharp correction in prices of bank stocks, says, D K Joshi, principal economist, Crisil: “The banks’ business will suffer both on account of falling credit growth and treasury income.” The market has reacted to it, says Sanjay Sinha, head of equities, SBI Mutual Fund: “Bank stocks have already factored in the impact of interest rate rise and hence the current valuations look attractive.”The main reason for the rise in interest rates has been high inflation which is expected to come down says, Abheek Barua, chief economist, ABN AMRO Bank: “Inflation should begin to moderate now but we may remain at these interest rate levels for some time before it starts declining.” It thus seems unlikely that Reserve Bank of India (RBI) might increase the interest rates any further. A decline is likely, in which case the current fall in bank stock prices opens up opportunity for investing. The treasury income for banks will go up with decline in interest rates. This has happened in the past. Between 2001 and 2003, banks saw their profits increasing significantly with falling interest rates on account of rising treasury income.In a scenario where interest rates have risen, valuations are cheap — the most attractive from the lot will be the banks with higher CASA ratio (current account and savings account as a percentage of total deposits), as the impact of interest rise is low on their spread. This is where public sector banks (PSB) hold good, adds Sinha: “PSBs are better poised as they are not leveraged on credit growth so even if the credit growth comes down a bit it would not impact them much. Also the higher CASA ratio should bail them out.”Along with the opportunity there are concerns in taking a contrarian call in this fall as Sandeep Nanda, head (research) Sharekhan, says: “Banks have gone cheaper but before taking a call I would like to see the inflation coming down and net interest margins stabilising.”See Express Money for hot banking stocks
