Turning of the interest-rate cycle and low valuations make banking stocks
Inflation, which was the biggest concern for the Indian economy during the first part of the year, is now down to single digit. It stood at 8.84 per cent for the week ended November 15. The continuous softening of crude oil price ? currently trading at $49.32 per barrel, it is nearly 66 per cent off its peak level of $145 per barrel on July 3 ? points towards a further moderation in inflation in the coming months.
While inflationary concerns have abated, growth-related concerns have taken centre stage as the global economic crisis and the consequent liquidity crunch hit home. In the light of these developments, the central bank?s monetary policy has changed from one of tightening towards during the first part of the year to one of easing now. The repo rate has been brought down to 7.5 per cent and the cash reserve ratio to 5.5 per cent.
Opportunity beckons
Analysts expect banking stocks to benefit from the lowering of interest rates.
A softer interest-rate regime is expected to improve the availability of capital with banks. Their margins, which have been under pressure in a rising interest-rate scenario, are also expected to improve in the coming quarters.
The ongoing global financial crisis is impacting India in many ways, one being the slowdown in GDP growth. According to a recent report on the banking sector by Angel Broking, in medium term domestic credit demand, especially from infrastructure and capex projects, is likely to ebb. As credit demand starts falling, interest rates are also expected to fall. However, given the strong latent demand for credit in the economy, the next round of consumer credit expansion could be round the corner (though some time away), and banking stocks will benefit from it.
Since January, the banking index has plummeted nearly 59 per cent, offering an opportunity to pick banking stocks at cheap valuations. Large-cap private sector bank stocks such as HDFC and Axis are available at nearly 47 and 58 per cent below their market price at the beginning of this year. Such stocks, which are available at cheap valuations (see table), are expected to witness a boost in their earnings in the near future due to the monetary easing. Private banks score over PSU banks because of their higher fee-based income. The relatively higher fee income intensity of such stocks will enable them to enjoy above-average return on equity in the long term.
The capital adequacy ratio, a measure of a bank?s capital that shows how well protected its depositors are, is also healthy for these stocks. The time is clearly right for investing in banking sector stocks.
