"Stock Trading Tips"

The Bank Nifty (index covering banking Stock Trading) is at its lowest in last 18 months. Bank Nifty Index was quoting at 11,484.7 in the beginning of FY12. It has fallen 23% to 8,839.8 while the broader market has fallen just 15%.

The reasons besides the weak macro-economic have been low capital adequacy, high interest rates and fear of increasing NPAs. Banking shares were also under pressure after global credit rating agency Moody’s Investor Service cut the standalone rating of India’s largest public sector bank, SBI in October 2011 due to concerns over capital and rapid deterioration in asset quality. The agency cut its rating on SBI’s financial strength to D+ from C- and lowered its hybrid debt rating on the bank to Ba3 from Ba2, following the reduction in financial strength rating.

The repo rate, the rate at which banks borrow from the RBI for short duration, was increased by 375 bps between March 2010 and September 2011 to control inflation. In this rising interest rate scenario, the net interest margin (NIM) of nationalised banks, which account for 75% of the assets of the banking system, increased from 2.64 % in March 2010 to 3.3 % in March 2011. However, in the period between March and June 2011 when interest rates have continued to rise, the NIMs of nationalised banks shrunk to 2.9%.

Outook: Outlook in the near term may improve if better than expected performance is reported in Q3FY12 results. Net Interest Margins and deterioration of asset quality are the two key areas that one should watch out for in Q3FY12. NIMs may improve sequentially as the base rate hikes of July take full impact and lower slippages should take away less from interest income as system-based NPL recognition no longer remains an overhang. On a sequential basis, provisions could be lower propping up net profit growth.

Private banks may also fare well or better than their PSU peers since the provisioning pressure isn’t likely to be as much. However, we see the scope of increasing loan restructurings across sectors including SEBs, Airlines, Metals, Telecom, Infrastructure, Power, Construction and SMEs which is likely to act as a continuous sentiment dampener until clarity emerges on a turning economic cycle.

Hence, if Bank Stock Trading rise in anticipation or in response to the Q3FY12 results, it may be a good idea to look at the numbers closely and prepare to reduce holdings if enough clarity is not available on NPA situation easing in the next few quarters.

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