Indian Banking Sector and Banking Stocks

Banking Sector - Knowns and Unknowns.

The Banking stocks have corrected sharply and the Bank Nifty has underperformed Nifty very much. Now we take a look at the factors favoring and affecting the banking sector.

Knowns :

* Fiscal-profligacy led market borrowings have tightened bond yields, thereby largely ending the public sector banks (PSBs)’s chances of recording healthy treasury gains.

* Earnings growth seems to have peaked for now—moderating credit growth, anticipated pressure on the net interest margins (NIMs), likely weaker fee income growth and higher credit costs will limit the bottom line growth. Private players are better placed compared with the PSBs in defending their bottom line growth.

Unknowns:

* While the above factors were largely known, the risk arising from the Indian banks’ international operations remains a major “unknown” due to the scanty disclosure in this regard by the banks.

* Besides, the ongoing negotiation over offering a second round of pension to the uncovered employees is another potential risk to the PSBs. If the banks agree to abide by the demand raised by the employee unions, they may have to face a significant additional pension liability, over and above the AS-15 provisions being made currently.

* PSBs may face capital constraints (Tier-I capital) as the Government of India (GoI)’s fiscal position may not permit capital infusion and lack of appetite in primary equity market currently. Private players are comfortably placed in this respect on the back of their recent capital raising.

The above unknowns has caused much weakness in the Indian banking stocks. Though cheap, Indian banks are likely to remain cheap in the near term as the world struggles with the after-effects of the credit squeeze on real economy. Despite the near-term weakness, the Indian banks are positive from the long-term perspective. Hence, investors can utilize the opportunities that may present themselves now and over the next 2 to 3 months to accumulate banking stocks.