Tuesday, January 24, 2006

Buy good quality banking stocks on every dip

The free lunch is over and banks will now have to hike their lending and borrowing rates, according to analysts. Though, slightly negative in the short-term, they believe that the move will ease pressure on the net interest margins, NIMs, of the banking sector and long-term investors should buy good quality banking stocks on every dip.

The RBI Governor, YV Reddy, in his quarterly review has increased the repo rate and reverse repo rate by 25 basis points taking them to 5.5% and 6.5% respectively. The main RBI objective is to control and pre-empt the inflation rate and protect future growth, feel analysts.

This does not seem to have gone down too well with the markets. The BSE Sensex after hitting a high of 5,152.53 points in the morning trade slid gradually to 5,105.85 points at 2:00 pm. The credit policy was announced at 12:00 noon.

While the main signaling rate, that is the bank rate, has been kept unchanged at 6%, three analysts polled by Moneycontrol believe that interest rates will be increased in the immediate-term. The Cash reserve ratio, CRR, too has been left unchanged at 5%.

“Banks will have to price in the costs that they are paying to borrow funds from the call money market,” says Vishal Goyal of Edelweiss Securities. In fact, many banks have already hiked their borrowing and lending rates by 50-75 basis points in the previous quarter, he adds.

The move, however, would benefit banks in the long-term as hiking lending rates would ease pressure on NIMs while being negative in the short-term as treasury income would be impacted, feels Kanan Shah of Networth Stock Broking.
However, all analysts are unanimous that the banking sector is undervalued and is poised for growth in the longer-term. Hence any dip in banking stocks should be seen as an opportunity to take exposure to the Indian economy’s growth, as macro-economic positives like a stable inflation and decent growth rates will help the banking sector.

They think that banks like Union Bank, PNB, SBI, ICICI Bank, Federal Bank and Centurion Bank have posted good numbers in Q3FY06 and are poised to perform well in the near as well as the long-term.
Saddam Hussein was sitting in his office whom to invade next "when his telephone rang...."
"Hallo, Mr. Hussein!" a heavily accented voice said, "This is Gurmukh from Phagwara, District Kapurthala. I am ringing to
inform you that we are officially declaring the war on you!"
"Well, Gurmukh," Saddam replied, "This is indeed important news!
How big is your army"
"Right now," said Gurmukh, after a moment's calculation, "there is myself, my cousin Sukhdev, my next door neighbour
Bhagat, and the entire kabaddi team from the gurudwara. That makes eight"
Saddam paused. "I must tell you, Gurmukh that I have one million men in my army waiting to move on my command."
"Arrey O! Main keha .. " said Gurmukh. "I'll have to ring you back!"
Sure enough, the next day, Gurmukh called again.
"Mr. Hussein, it is Gurmukh, I'm call ing from Phagwara STD, the war is still on! We have managed to acquire some infantry
"And what equipment would that be, Gurmukh" Saddam asked.
"Well, we have two combines, a donkey and Amrik's tractor."
Saddam sighed. "I must tell you, Gurmukh, that I have 16,000 tanks and 14,000 armoured personnel carriers. Also, I've increased my army to 1-1/2 million since we last spoke."
"Oh teri ....." said Gurmukh. "I'll have to get back to you."
Sure enough, Gurmukh rang again the next day.
"Mr. Hussein, the war is still on! We have managed to get ourselves airborne...... We've modified Amrik's tractor by adding a couple of shotguns, sticking on some wings and the pind's generator. Four school pass boys from Malpur have joined us as well!"
Saddam was silent for a minute and then cleared his throat. "I must tell you, Gurmukh, that I have 10,000 bombers and 20,000 fighter planes. My military complex is surro unded by laser-guided, surface-to-air missile sites. And since we last spoke,
I've increased my army to TWO MILLION!"
"Tera pala hove...." said Gurmuk, "I'll have to ring you back."
Sure enough, Gurmukh called again the next day.
"Kiddan, Mr. Hussein! I am sorry to tell you that we have had to call off the war."
"I'm sorry to hear that," said Saddam. "Why the sudden change of heart"
"Well," said Gurmukh, "we've all had a long chat over a couple of lassi's, and decided there's no way we can feed two million prisoners of wars!"