Bank Stocks: Forecasting a Short-Lived Bout of Weakness

Mumbai: Shares of banks weakened on Thursday in response to the Reserve Bank of India’s move to impose an incremental cash reserve ratio (CRR) as part of its efforts to drain out additional liquidity of over ₹1 lakh crore from the system following the withdrawal of the ₹2,000 notes. This decision could affect banks’ net interest margins in the short term, according to analysts.

The Nifty Bank index declined 0.7% compared to the benchmark Nifty’s 0.5% decline. Equitas Small Finance, AU Small Finance, Bank of Maharashtra, and Bank of India all saw a drop between 2% and 5%. Kotak Mahindra, Bandhan, Indian Overseas Bank, Canara Bank, and Union Bank each declined nearly 1.5%.

“The measure is temporary and aims to remove additional liquidity, but it means that this portion of funds will not yield better returns, which will impact net interest margins and profits,” said Kaushik Dani, fund manager – PMS, Abans Investment Managers. “However, the policy also acknowledges inflation risks, indicating that rate cuts will be difficult this year, causing banks to face higher rates for a longer period.”

“This CRR hike will increase their cost of funds, impacting profitability,” said V K Vijayakumar, chief investment Strategist at Geojit Financial Services. “However, since banks are experiencing good credit growth and their NPAs are declining, they can easily absorb this marginal additional cost.”

Bank Nifty has gained nearly 13% since April 1, compared to a 10% gain in the Nifty, as foreign portfolio investors invested nearly ₹56,000 crore into financial services stocks.

Analysts believe the impact of this additional CRR on banks could be minimal and temporary.