Analysts Say Sell India Bank Stocks on RBI-Induced Relief Rally

(Bloomberg) -- India's state-run banks are likely to rally after the regulator allowed lenders to spread out losses on bond investments. To some analysts, the potential gain is an opportunity to sell their positions.

The Reserve Bank of India late Monday allowed banks to spread bond-trading losses incurred in the December 2017 and March 2018 quarters equally over as long as four quarters. While this decision will provide some “relief” to government-owned banks in the short-term, it merely pushes the problem to the new fiscal year that began April 1, analysts said.

The Nifty PSU Bank Index, a gauge of state-owned banks, surged as much as 2.9 percent --the most in a week. Union Bank of India rose as much as 5.4 percent while Bank of India rallied 4.8 percent.

Read: Investors Looking for Reasons to Buy India Bonds Now Have Plenty

The RBI's move is also small comfort for India's banking sector, which has been roiled by a series of fraud and corruption allegations that are expected to impact economic growth.

Here's what analysts and strategists are saying about the central bank's decision:

JPMorgan (Seshadri Sen)

• While RBI's decision to provide some accounting relief eases the pressure on fourth-quarter earnings for banks, it merely postpones the problem to fiscal year 2019
• Taking the pressure off bond yields will be a net benefit to public sector banks
• Decision could trigger a stock rally in the sector and investors should use that “temporary” surge to exit state-run bank stocks as significant changes persist for these banks in terms of low capital ratios, eroding deposit franchises and the need to overhaul credit systems

Nomura (Adarsh Parasrampuria)

• The central bank's measure will only provide a temporary relief to state-run banks, particularly State Bank of India and Punjab National Bank whose mark-to-market-related provisioning was large in the December quarter
• This will only be considered as tier-2 capital and will be negative for “capital-starved” state banks
• The relief is restricted mainly to the losses incurred in third and fourth quarters and any further increase in bond yields from here won't be spread over

Motilal Oswal Securities (Shrikant Shetty)

• “This could act as a small trigger for the banking stocks today, but no one is going to go berserk as the bigger issues still remain. They still need to be resolved.”

IDFC Securities (Mahrukh Adajania)

• Fourth-quarter earnings will look better but fiscal 2019 will be unchanged
• Earnings will remain weak and banks may still report losses but they may now be lower than expected

PRB Securities (Rajendra Wadher)

• “The RBI move will be positive for shares of state-owned banks as it will boost their Jan-March quarter earnings. Since banks have already booked their entire Oct-Dec losses, their MTM losses for the Jan-March quarter will come down considerably.”
• “We expect state-owned banks to outperform broad markets, which may be under pressure due to weak global cues.”

To contact the reporters on this story: Divya Balji in Singapore at dbalji1@bloomberg.net, Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net, Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net, Ameya Karve in Mumbai at akarve@bloomberg.net.

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Jeanette Rodrigues, Ravil Shirodkar

©2018 Bloomberg L.P.

With assistance from Divya Balji, Santanu Chakraborty, Abhishek Vishnoi, Ameya Karve