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.