Weakness in bank stocks seen short-lived

economictimes.indiatimes.com:

Bank of India's move to impose an incremental cash reserve ratio (CRR) as part of its attempts to drain out additional liquidity of over ₹1 lakh crore from the system following the withdrawal of the ₹2,000 notes from the system. The decision could impact banks' net interest margins in the short term, said analysts.

The Nifty Bank index declined 0.7% as against the 0.5% decline in the benchmark Nifty. Equitas Small Finance, AU Small Finance, Bank of Maharashtra, and Bank of India fell between 2% and 5%.

Kotak Mahindra, Bandhan, Indian Overseas Bank, Canara Bank and Union Bank declined nearly 1.5% each. «The measure is temporary and to suck out additional liquidity, but it effectively means this unavailable portion of funds would not yield better returns, thereby impacting net interest margins and thus profits,» said Kaushik Dani, fund manager — PMS, Abans Investment Managers.

«However, the policy also acknowledged upside risks to inflation, which means that rate cuts would be difficult in the current year, and banks will have to deal with higher rates for an elongated period.» «This (CRR hike) will raise their cost of funds impacting profitability,» said V K Vijayakumar, chief investment Strategist at Geojit Financial Services. «However, since banks are experiencing good credit growth and their NPAs are declining, they can easily absorb this marginal additional cost.» Bank Nifty has gained nearly 13% since April 1 compared to a 10% gain in the Nifty as foreign portfolio investors pumped in nearly ₹56,000 crore into financial services stocks.