Sunday, October 13, 2024
HomeStocksAre interest rate cuts good for bank stocks? Well, it is a...

Are interest rate cuts good for bank stocks? Well, it is a double-edged sword!

-



The start of a monetary easing cycle by the US Fed opens up a window for other emerging market central banks like the RBI to also start lowering interest rates by December 2024. With some of them already trading at mouthwatering valuations following sustained sell-off by FIIs, bank stocks are emerging as one of the Street’s favourite bets in this new macro cycle.

On one hand, falling interest rates may not only put pressure on margins but also make it tougher for banks to attract deposits. At the same time, the demand for credit will go up. Besides, rate cuts are credit positive for banks’ asset quality as making payments becomes more affordable for borrowers with floating-rate loans.

When an interest rate cycle turns and interest rates come off, loans get repriced downward faster than deposits, constraining net interest margins.

“But as the deposits start repricing, margins then start to pick up, because loans are linked to the external benchmark. So that part comes off faster and then the deposits reprice depending upon the ALM (asset liability management) profile and maturity profile of deposits. But typically, if rates are benign, then the margins follow a trajectory where it comes off a bit and then starts to rise,” Shibani Sircar Kurian of Kotak Mahindra Mutual Fund told ETMarkets.

Banks or NBFCs which are wholesale-funded benefit more in a rate cut cycle because their cost of borrowing comes off faster than banks who are more retail-funded because their liabilities are sticky and of longer duration.

“In the initial part of a rate cut cycle, NBFCs tend to benefit significantly because their asset side is fixed. So, typically an auto financier, for instance, or any other NBFC where the asset side is fixed in nature, but liabilities are wholesale, they see margin expansion in a rate cut cycle. Similarly, wholesale-funded banks and those with a stickier asset side profile, which are more fixed in nature, tend to benefit,” Kurian explained.Also read | As stock market is shifting from value to quality, how S Naren is investing

NBFCs such as SBI Cards, Shriram Housing Finance and Mahindra & Mahindra Financial Services Limited (MMFSL), which have 100% of their loan book fixed, would be immune from repricing in the near term, while on the opposite spectrum, LIC Housing Finance, with 99% of its loan book being floating, should face a negative impact of repricing, Nomura said.

At a consolidated level, Bajaj Finance may see a negative impact of rate cuts on its yields due to a higher share of mortgage loans in the mix. However, on a standalone basis, it would be comparatively shielded with the majority of its book being fixed-rate.

Consumption-focused lenders will also benefit in a rate cut cycle as credit becomes more accessible.

“Rate cuts could lead to a good amount of treasury profits on the investment book of the banks. They are the cheapest sector (relative to history) in the entire market at this point. So I believe rate cuts would give a positive benefit to banks and NBFCs. They can help them with their borrowing costs as well,” S Naren, ED and CIO of ICICI Prudential AMC, said.

“When the banks focus on deposits, the pressure on trying to compete aggressively on credit may go down. And that may even result in better margins because the focus is on deposits and not on reducing credit rates. So it may lead to a positive outcome for the sector. With interest rates coming down, maybe the deposit pressure will also come down, and that could improve the net interest margins,” he said.

Bank stocks have been under pressure due to slowing loan growth, deposit competition, uncertainty on future profitability path, and liquidity coverage ratio guidelines, but most of the negatives are already in the price. In the last 3 years, Kotak Mahindra Bank has delivered a negative return of 6.5% while HDFC Bank has also underperformed with a gain of just 9.5%.

“Within equities, there is clear value in the banking and financial services sectors. In fact, these sectors currently have one of the highest weightings in the history of our fund. However, it’s important to note that these are not low-risk sectors, so we continuously reassess our positions,” Naren said.

Also read | What Fed’s jumbo rate cut of 50 bps means for stock market investors in India

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



Source link

LATEST POSTS

NITI Aayog: Consultant to be hired to study impact of rural jobs scheme

The Centre will soon start evaluation of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) to assess its on-ground impact and further improve...

Jio writes to telecom minister Scindia, seeks auction for satcom spectrum

Reliance Jio has sought telecom minister Jyotiraditya Scindia's intervention to get regulator TRAI to issue a revised consultation paper on a proposed...

How Bad Could This Get?

If you own Boeing (NYSE: BA) stock, you've probably been glued to news of the protracted labor strike by Boeing's machinists union, now entering...

Wipro bonus issue: Wipro board to consider bonus issue of shares along with Q2 results

The Board of Wipro will consider issuing bonus shares to investors along with its financial results for the quarter ended September 2024."The Board will...

Most Popular

spot_img