Moratorium extension hurts financial stocks

RBI's extension of loan moratorium by three more months till August 31, 2020 caused extensive damage to bank and financial stocks, as investors feared it would impact bank and finance companies balance sheets.

The market, in a panic, even ignored the additional 40 basis points repo rate cut to 4 per cent, which makes it cheaper to borrow for those looking to expand their businesses.

The immediate beneficiaries of interest rate cut, auto and cement sector stocks, gained. Among the financials, home loan provider HDFC fell 5.10 per cent. The other big losers included Axis Bank (-5.21 per cent), ICICI Bank (-3.94 per cent), Bajaj Finserv (-4.61 per cent) and Bajaj Finance (-4.54 per cent).

In the bond market the yield on the 10 year 6.45 per cent 2029 government bond yield fell 15 basis points to 5.88 per cent (6.03 per cent previous close) intra-day but later recovered to close at 5.96 per cent.

"Though this is a welcome step and can provide relief to the borrowers, there is a fear that the burden on the banks may further increase due to the impact of the moratorium on banks' already huge pile of NPAs. Further RBI failed to announce any relief on restructuring of loans to address the risk of rising asset quality issues in the banking sector," said Siddhartha Khemka, head-retail research, Motilal Oswal Financial Services.

Shrikant Chouhan, executive vice president, equity technical research, Kotak Securities, said, "The most sensitive Bank Nifty closed lower. It was under immense selling pressure as the spreads (gap) between lending and borrowing are narrowing. On the other side, rate sensitive sectors and immediate beneficiaries of a cut in interest rates, especially cement and auto stocks did extremely well."

The Nifty Bank Index fell 2.57 per cent but for the week ended the index was down almost 8.5 per cent due to deteriorating outlook of the financials.

Financials proved a big drag on Sensex and Nifty50 as they closed down by 0.84 per cent and 0.74 per cent at 30,672 and 9039.25.

Both foreign portfolio investors and the domestic institutions were net sellers of equities worth Rs 1,353.90 crore and Rs 344.16 crore, respectively..

"This extension of moratorium without-adoubt would ease ground level gridlock but is perceived negative for banks and NBFCs operating in the listed space,” said Jimeet Modi, founder & CEO, Samco Securities.