Systemic risks in banking sector worrying investors

Banking and financial stocks saw a sell-off on Tuesday, amid fears of contagion risks stemming from the financial sector’s exposure to real estate and stressed corporate groups. Analysts said that concerns over risks posed by these stressed exposures to smaller, under-capitalised banks had triggered the sell-off.

“Right now, there is a risk perception around some of the real estate-related exposure. There are concerns over rising bad loans in this space, and their fallout on the system. Hence, banks that are susceptible to these issues are seeing investor sell-off,” said Vikas Khemani, founder, Carnelian Capital Advisors.

On Tuesday, YES Bank was among the biggest losers in the banking segment, with the stock shedding 23 per cent. RBL Bank (-8.7 per cent), UCO Bank (-7.8 per cent), and Karur Vysya Bank (-7 per cent) were among the other major losers in the same segment.

According to fund managers, there is concern around some of the smaller private lenders. “There are concerns whether certain private lenders are well-capitalised. Due to troubles around their asset quality, they have shrunk into smaller-sized banks,” said Sonam Udasi, fund manager at Tata Mutual Fund.

Market participants said that investors were worried that issues surrounding nonbanking financial companies (NBFCS), as well as smaller cooperative banks, could pose systemic risks.

“Such concerns have led to even banks that have not been hit with asset-quality issues, coming under selling pressure,” added Udasi.

The BSE Bankex has corrected over 6 per cent since the Reserve Bank of India placed restrictions on Punjab and Maharashtra Co-operative Bank on suspicion of fraud at the bank.

Further, links of the bank with Housing Development and Infrastructure (HDIL) has raised worries over lenders’ real estate loan book.

Among NBFC stocks, Dewan Housing Finance Corporation saw a single-day fall of 19.9 per cent on Tuesday. This was followed by SREI Infrastructure Finance (-14.5 per cent) and Indiabulls Ventures (10 per cent).

Analysts say that stateowned banks are also facing selling pressure, as the large well-capitalised ones are expected to take over smaller state-owned banks that have seen sharp deterioration in their asset quality.

On Tuesday, State Bank of India ended 5.5 per cent lower at ~256.

Weakness in the overall economy, reflected in the pickup in pace of downgrades, has compounded woes.

On Tuesday, rating agency CRISIL said that credit quality pressures had intensified for India Inc in the first half of 2019-20, “driven by interplay of factors, including global and domestic economic slowdown, sharp fall in consumption demand, and slower government spending”.

“Constrained access to funding also affected the credit profiles of entities across sectors, especially non-banks and real estate,” said the rating agency. However, fund managers say the current sell-off may be an opportunity, if investors can deal with medium-term volatility.

“There are only few banks that have the balance sheet to fulfil the capital needs that would arise when the economy turns. As and when this happens, such lenders are poised to see higher market share, mindshare and, at some point, higher valuations,” said a fund manager.

Some analysts also said Tuesday’s sell-off might be caused by short-sellers building heavy positions.

“When markets are nervous, it is easy to create panic and short-sell stocks. Regulators must step in to check if a fear psychosis is being created by short-sellers through rumour mongering or other means,” said an analyst.