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Stocks of public sector banks are likely to trade weak in the coming week as investors are likely to exit on worsening asset quality scenario, while private sector lenders are likely to remain the top picks. There has to be some selling in PSU counters as asset pain is going to stay for a few more quarters.
All major public sector banks have shown asset quality concerns in their Jul-Sep results, underlining the stress in the banking system. Last week, State Bank of India reported a spike in fresh slippages to the tune of 84.95 bln rupees and restructured assets of 46.94 bln rupees in Jul-Sep. Asset quality pressure is increasingly visible at other larger government banks, which have reported higher NPAs in the last two reporting quarters. We believe this trend will continue with the other banks as the effect of the economic slowdown is fully reflected in their asset quality performance.
RBI cuts repo rate earlier than expected in December, banks are likely to benefit significantly as it will boost sentiment and credit offtake will increase. The case for an early rate cut has emerged after the October headline inflation rate fell to a nine-month low of 7.45% in October from 7.81% in September despite increase in diesel prices a month ago. There is a strong chance for rate cut by RBI and that will help banks.
Thursday, Finance Minister P. Chidambaram said banks have done their best on lending rates and a further reduction would be possible only if the central bank lowers its key policy rates. Chidambaram said though housing and automobile loans have risen sharply after banks cut lending rates over the last few months, there is no such pick-up in loans for consumer goods. Market largely ignored the news of Chidambaram urging the RBI to expedite the process of issuing new banking licences as Governor Subbarao said the RBI will wait for enabling conditions before issuing such licences.
