Why fortunes of already-reeling bank stocks will get much, much worse

Bank stocks came under intense selling pressure on Monday: While shares of big banks like ICICI Bank tripped almost 4 percent, State Bank of India's shares, also dived 1.5 percent. Axis Bank, Union Bank and Canara Bank shed more than 3 percent.The sector index,Bankex, also tumbled 2 percent.

The Sensex also slumped 1.5 percent under the pressure of broad-based selling.

The banking index hit a low of 9,175 on December 29, then went on to gain 40 percent by the middle of February. Now, it is trading around 11,600. AFP

For banks, the pain might just be starting.The banking index hit a low of 9,175 on December 29, then went on to gain 40 percent by the middle of February. Now, it is trading around 11,600.

In a flash note issued by HSBC recently, the brokerage warned about the outlook for the sector.

That cautious sentiment has been adopted by several broking houses. Macquarie estimates that in the quest to adhere to Basel III norms, Indian banks will need to raise capital totalling Rs 1.5 lakh crore.

This capital will be needed not just for solvency but also for raising credit growth to 18 percent. In addition, more stringent priority sector regulations and financial inclusion targets have also been announced for banks. The Union Budget, for instance, raised the target for agricultural loans by Rs 1 lakh crore. Agriculture has been a major contributor to bad assets over the past few years and will impact profitability of banks further. Macquerie sums up that sentiment perfectly in a recent report: "What is good for customers is notnecessarily good for shareholders" (see chart).

Source: Macquarie

As interest rates have remained sticky, small enterprises fall under pressure more quickly than others, and certain sectors like textiles, telecom, real estate, power and SMEs will definitely come under pressure to undergo more restructuring.(see chart)

Even S&P in a recent note made it clear that Indian banks are in for bad times ahead. The international ratings agency predicted that economic growth would not pick up significantly to support higher credit growth. Margins, it said, would remain tight with hardly any room for expansion. Bad assets are also set to rise.

There's little doubt that analysts have turned bearish on the sector. When even experts become wary about predicting improvements in bad loans, it's probably a good thing for ordinary investors to remain cautious.

Updated Date: Dec 20, 2014 17:17 PM

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