Bank Stocks Outlook for the week: 01.10.2012-05.10.2012


Hopes of improvement in demand for loans following positive investment cues from the industrial sectors and a likely firm movement in broad market are seen keeping bank stocks firm in the coming week. Profit sales in line with the trend in the broad market may, however cap the upside in bank stocks.

With the interest rate environment expected to turn southwards and cost of funds already seen coming down, we believe rate sensitive are expected to be in demand. Also, gradually as the sentiment improves due to government action, we believe 15-16% industry credit growth (versus 17% targeted by RBI) can be a reasonable assumption.

Senior bank officials have indicated that the Reserve Bank of India has been pushing banks to achieve the 17% indicative loan growth target set for the current financial year ending March. We continue to eye cues from the Reserve Bank of India on whether the central bank will be in a position to consider a policy rate cut on Oct 30 or even a further liquidity boosting measure.

The Reserve Bank of India will announce its second quarter review of the monetary policy for 2012-13 (Apr-Mar) on Oct 30. The September inflation numbers will be more important as they will play a part in the RBI's rate decision in its next policy review meeting. We believe that, markets will consolidate and move up in line with further announcements on core reforms, which are now widely anticipated. The government will release wholesale price index-based inflation for September on Oct 15.

Despite strong performance from state-owned bank stocks in recent weeks, investors continue to prefer investing in private banks which have a more consistent track history on asset quality and profitability. One may use corrections to accumulate banking stocks at lower levels for a longer term horizon. We continue to prefer private banks like Yes Bank, City Union Bank on account of earning visibility. In the PSU (public sector unit) space, we prefer Bank of Baroda, Dena Bank and State Bank of India.

The market will also await further clarity on the status of the announcements made by the government on restructuring of state electricity board loans. The benefits of the debt restructuring authorised by the Indian government for the beleaguered Indian state electricity boards will depend on important conditions being met.

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