The Hindu Business Line : Bank stocks may remain under pressure

Kolkata May 11 In a backdrop marked by performance expectations that have been not quite been met by banks, a host of factors are currently weighing on banking stocks, especially the small-cap ones.

Banking stocks, about a dozen of which are included in Nifty Junior, were, however, near the top of Friday's list of gainers. Two of these, ING Vysya and Bank of Baroda, ended among the top five performers, with 5.5 per cent and 3 per cent gains respectively on NSE.

Loan growth

Brokerages that have lately researched smaller cap bank stocks feel these may, selectively, remain under pressure for some time, particularly till they are able to factor in the trends made evident in the wake of the latest quarterly figures. In a number of cases, slippages have been all too evident even while most players have seen larger issues like capitalisation and fund raising remaining key challenges.

These have made possible risks to banks quite clear, it is pointed out. In the case of Bank of Baroda, for instance, the possibility of steep loan growth hitting net interest margin has been referred to.

The bank, notes Emkay Stock & Share Brokers, has reported a year-on-year growth of 16.4 per cent in net profit for the fourth quarter, lower than its estimates, driven by higher provisioning for standard assets and taxes.

Steep loan growth (39.6 per cent y-o-y) has started putting pressure on the low-cost deposits as their proportion has declined by 155 bps quarter-on-quarter, it is pointed out.

"With no excess SLR on books we believe that the net interest margin would remain under pressure for next few quarters," Emkay has mentioned, adding that it has downgraded earnings for fiscal 2008 estimated and fiscal 2009 estimated by over 5 per cent and 3 per cent respectively.

Exception

Certain exceptions also stand out. Angel Broking, which has researched Union Bank of India, has taken note of the bank's growth in net interest income in the fourth quarter, improved yield on advances and a 16 per cent growth in advances.

Calibrated growth in advances and increased focus on high yielding loan assets helped the bank improve its yield on assets by 138 bps to 8.75 per cent (7.37 per cent), it is mentioned.

In an increasing interest rate scenario, cost of funds is increased by only 66 bps to 5.23 per cent. The bank has tried reducing its reliance on bulk deposit to contain cost of funds, it is stated.

Rating agency CARE, while reaffirming an A rating to City Union Bank's subordinated bond issue, has noted that positive factors have been offset by the bank's small size, regional concentration, relatively high deposit cost due to lower share of low cost deposits and competitive pricing of deposits etc.

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