Downgrades leave bank stocks bruised, soul searching is on

A series of bank sector downgrades by various broking firms have led to a sharp fall of 3.5 percent in the banking index. The most prominent of these downgrades was by Morgan Stanley, which, in a recent report, noted that the asset quality of state-owned banks could lead to the next downward spiral for stocks in the sector. The report said a weak macro-scenario would affect revenue growth and affect asset qualities. Since valuations are around historical levels, there is still some downside left in these stocks.

[caption id=“attachment_63820” align=“alignleft” width=“380” caption=“Apart from Morgan Stanley, Ambit Capital released a stress report on Indian banks, highlighting that domestic banks are under more stress. Reuters”]  [/caption]

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Bond spreads - the cost of term deposits has been revised upwards while an equivalent appreciation was not visible in bond yields - are resulting in a margin compression to the tune of 30-70 basis points (100 basis points make up one percentage point), the brokerage added.

On Thursday, the banking index was the weakest among all the indices, down by 3.5 percent at 9606.5 points. Axis Bank was the weakest among the top banking stocks, tumbling over 5.11 percent to Rs 1,109, while ICICI Bank fell 5.04 percent to Rs 863.70. All the stocks in the banking index were trading lower than their previous day’s closing levels. The strongest among them was HDFC Bank, which was down marginally (o.5 percent) at Rs 464.70.

Apart from Morgan Stanley, Ambit Capital released a stress report on Indian banks, highlighting that state-run banks are under more stress than private sector ones. India’s largest bank, the State Bank of India, too disappointed the market with its quarterly results, causing the stock to fall to a low of Rs 2,073 on Thursday, down by nearly Rs 150, since the announcement of its results.

Morgan expects Bank of Baroda to be the biggest loser, followed by Oriental Bank of Commerce and the SBI.

Bank stocks in Europe also had a bad day, as European markets plunged again over the lack of a resolution to the sovereign debt crisis.