(Bloomberg) -- India's shadow banking crisis has sucked in more financial firms this week, eroding a stock market rally that's been driven by a surprise $20 billion tax cut package.
The S&P BSE Sensex Index fell 0.5% on Thursday, set for its fourth day of losses, ending a surge since the Sept. 20 announcement of the tax cuts. Financial stocks, which account for 45% of the benchmark index, contributed the most to the declines since late last week, according to data compiled by Bloomberg.
Debt concerns at lenders including Indiabulls Housing Finance Ltd. and a co-operative bank, and worries a cleanup in corporate debt could be prolonged, have spooked the financial markets. The sight of depositors lining up to pull their money from Punjab & Maharashtra Co-operative Bank Ltd., after the central bank put limits on lending, has also been unsettling.
The Reserve Bank of India on Friday tweeted the “banking system is safe and stable and there is no need to panic.” Shares in Indiabulls Housing Finance rose as much as 14% on Thursday, the most since August as nation's stock markets reopened after a one-day holiday, while those in Yes Bank Ltd. jumped 29%, the most since Feb. 14.
READ MORE: India's Yes Bank Shares Surge as Much as 29% After Analyst Call
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Here is what the analysts are saying:
Stay Selective
Negative news flow around lenders has “overshadowed the recent tax cut tailwind, bringing focus back on sector issues: liquidity issues and contagion risks,” Jefferies Financial Group Inc. analysts including Bhaskar Basu wrote in a note on Tuesday.
Basu said he likes non-bank lenders with a strong liability base, low asset quality risks and good earnings visibility. He prefers stocks including Bajaj Finance Ltd. and Mahindra & Mahindra Financial Services Ltd.
Negative Impulse
Credit Suisse Group AG on Tuesday warned that “banks are not likely to grow their loans” as companies are likely to retain almost 90% of the savings spurred by the tax cuts. Materials, energy and industrial companies are not planning any new capital expenditure, Neelkanth Mishra, the broker's India strategist, wrote in a note on Oct. 1.
Renewed Concerns
There have been “renewed concerns” around India's banking system's stability in the last week but the corporate tax cuts will help economic growth, UBS Group AG strategist Gautam Chhaochharia said in a television interview with Juliette Saly and Rishaad Salamat.
Chhaochharia's June 2020 target for the NSE Nifty 50 index is 12,300 and he remains overweight on financial, property and oil & gas stocks.
--With assistance from Juliette Saly and Rishaad Salamat.
To contact the reporters on this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net;Ishika Mookerjee in Singapore at imookerjee@bloomberg.net
To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Teo Chian Wei, Marcus Wright
©2019 Bloomberg L.P.
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