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“Indian Banks: A Surprising Success Story in Comparison to US and European Counterparts”

Indian banking equities have suffered as a result of the turmoil in the US and European banking sectors. So far in March, the Nifty Bank index has decreased 3.3%. Even before to the Silicon Valley Bank (SVB) crisis, the index was trading poorly.

Investors were uneasy due to concerns regarding the effects of the sector’s exposure to the Adani group. Investor suffering has increased as a result of developments relating to SVB and the Credit Suisse crisis as well as its possible effects on tightening global liquidity. There were worries about a potential contagious risk. Yet, sentimental impacts aside, it is considered that Indian banks are on very solid basis.

The analysts at Kotak Institutional Equities wrote in a note on Monday that “India has experienced relatively little growth in bond yields and interest rates; Indian banks are significantly different from US banks in numerous fundamental ways.

The makeup of deposits is a significant component that is viewed as a defense against the possibility of a liquidity crisis. In contrast to several US banks that maintain significant sums of deposits, Indian banks have a bigger share of retail deposits in their total deposits (the retail portion of savings accounts and fixed deposits), according to Kotak analysts. Concerns about significant unrealized losses in their (US banks’) bond portfolios are what ultimately motivates this. It is important to note that compared to wholesale and corporate deposits, retail deposits are more sticky.

Second, the Kotak research noted that a significant chunk of the bond book held by Indian banks are maturity securities. Securities that must have monies kept in them until the maturity date are known as held-to-maturity securities.

“Unlike the US, banks are required to make provisions for unrealized mark-to-market losses in addition to the maturity-to-maturity portfolio. Also, practically all banks make provisions in real-time, which lessens the timing impact of loss selling, according to Sujan Hazra, chief economist and executive director of Anand Rathi Shares & Stock Brokers.

However, economists claim that Indian banks’ capital positions are strong generally, giving them a safety net during such crises. In truth, Indian banks have encountered difficult solvency issues over the past ten years, but their funding and liquidity have remained solid and have played a significant role in sustaining their overall credit quality, according to global rating agency Moody’s Investors Service. Is.

However, the Reserve Bank of India (RBIcomparatively )’s modest interest rate increase in comparison to the US Federal Reserve could potentially prevent a scenario in which banks experience increased financial stress as a result of tighter liquidity.

But, this does not imply that banks in India are immune to negative risk. Deposits are being revalued as a result of increased interest rates, increasing the cost of financing. This would put pressure on the sector’s net interest margin, which has recently been a source of comfort for investors. Also, the process of raising deposits might be expedited.

Trends in loan growth are important given how much overall inflation is harming urban spending and how slowly rural economies are recovering. According to the most recent information released by the RBI, credit growth for the seven days ending February 24 was 15.5% higher than a year earlier. This growth rate was less than the 16% observed in the previous two weeks ended on February 10. A drop was anticipated due to rising rates.

Therefore, it is unlikely that banking stocks would outperform in the foreseeable future. Despite solid asset quality and modest provisioning, the overall market attitude is pessimistic, according to an analyst who asked to remain anonymous.

Also Read: “UBS’s Credit Suisse Takeover: A Signal for the Banking Industry, says Uday Kotak”


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