Rising inflation takes toll on banking stocks

MUMBAI: Early in 2008, when the general consensus among brokers and analysts was that interest rates had peaked, banking stocks were among the favourites. And along with the banking counters, sectors that were dependent on domestic consumption were also looking attractive over the next year.
However, in the three months since the banking index hit its 52-week high of 12,679 on January 14, a lot has changed.The banking index has lost a little over 37% since and the slide is nearly uniform in PSU as well as private banks. The rising rate of inflation ��� which hit 7% last Friday ��� raises the prospect of a higher interest rate for the market and spells bad news for the industry. This is because in a higher interest rate regime, companies and people borrow less which leads to drop in business for banks.
Analysts also believe exposure to the the overseas CDO (collateralised debt obligation) market, mark-to-market loss from forex derivatives exposure of clients and treasury losses due to rising yield could also affect banks' bottomline this quarter. The government's Rs 60,000 crore farm loan waiver also had an impact on investor sentiment relating to banking stocks.
With negative news flowing in, its not surprising that banking stocks are trading sharply lower. But experts say determining the outlook for the banking sector is complex.
A host of factors will impact banking stocks, a few parameters alone cannot be taken into consideration. Going forward, the factors that will impact performance of banking stocks are credit offtake and any rise in non-performing assets, said Gopal Agrawal, fund manager-equity, Mirae Mutual Fund. "At current levels the valuations of private sector banks are reasonable," Agrawal said.
Some analysts prefer PSU banks. "I would prefer public sector stocks at these valuations as they would be less impacted by forex derivatives losses," said Mangesh Kulkarni, analyst, Almondz Global Securities. "The top 4-5 banks like SBI, Bank of India, BoB and Canara Bank look attractive. Banks are likely to post lower investment income which will affect their overall performance," Kulkarni added.