India financial sector sunk for rest of year – DNB

DNB Asset Management says in its latest monthly update for the India portfolio that efforts by the country’s central bank to support its currency through interest rate maniuplation has hit margins of banks hard, effectively ending any hopes of decent profitability through 2013.

Both Yes Bank and Union Bank of India among the biggest contributors to losses through July. Yes contributed 40 basis points of negative performance through the month, and Union Bank some 20 points, DNB reported.

India’s central bank has squeezed liquidity by restricting the availability of funds for banks at the short end of the market. Cash reserve ratios have effectively, although not formally, been raised. All this has been done in order to protect the rupee, DNB said.

“The sudden move by the central bank of India to squeeze liquidity out of the system to stabilize currency volatility caused short rates to harden.This turned out to be negative for all banks, particularly wholesale funded banks. Yes Bank, being one of the better known wholesale funded banks fell sharply because of the central bank’s move. Similarly, the case with IndusInd Bank and Union Bank of India.”

“2013 thus presents a major challenge to the banking system in India. Whereas the best of the banks will pull through, there will be downgrades and disappointments galore. One sees a difficult 6 months ahead.”

Weather has also played a part in ongoing losses: the annual Monsoon has been good this year. This has created opportunities for tractor manufacturers such as Mahindra & Mahindra, but has been challenging for the cement industry.

JK Lakshmi Cement was the biggest contributor to negative performance through the past month, causing some 63 points lost.

On a positive note, defensive sectors such as pharmaceuticals helped stem losses, including the portfolio holding in Sun Pharma, the biggest player in the sector by market cap.

Future prospects

The impact of politics will be increasingly felt over the coming three quarters, DNB added, because of the national elections expected within that time.

July opinion polls show the ruling coalition losing ground “almost everywhere”

It added: “What is not clear is whether the principal opposition party has enough legs to put together a majority. This outcome will be crucial – for the economy, the country and for stocks.”

 

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