The banking sector across the world is reeling under severe pressure, particularly after the fallout of multiple lenders including Credit Suisse, Silicon Valley Bank (SVB) and Signature Bank. Banking stocks have been majorly unable to rebound from this crisis ahead of the Fed's policy meeting outcome.
Credit Suisse’s share price plunged further this week and the cost of insuring the bank’s bonds against default has reached distressed levels. The bank’s insurance costs have risen due to a crisis of confidence following the failure of the Silicon Valley Bank.
Analysts tracking the sector across the globe, believe that the sentiments for the banks may remain feeble but the long-term story is healthy and intact. However, in the near-term measures have been put in place after the great financial crisis to limit contagion risk.
Experts believe that neither the profitability nor the valuations are likely to guide the sentiments for the banking sector. It will be driven by liquidity and cash flows. "In our view, the European bank sell-off is mainly driven by profit-taking and a reassessment of recessionary risks, which is not supportive for the profitability of the sector," said Amundi Asset Management in its recent report. "In the case of a further escalation in this crisis, we expect the majority of the counterparty exposures to be collateralised, so we do not expect material losses from a potential resolution or wind down," it said. The sector is well-capitalised and liquid and we don’t see any other specific instances that pose large risks to other banking stocks. It will be important to monitor liquidity and deposit flows for the sector over the coming periods, it added further. Global banks' caving is sending shockwaves across markets. This is likely to keep global markets on the boil with large spillovers on Indian equities in 2023, said Nuvama Institutional Equities. "Fed’s actions remain the key." Unlike 2022, liquidity is no longer in surplus and domestic demand leaves much to be desired. Focus must be on cash flows rather than valuations, it said and increased its underweight rating on banking, financial services and insurance sector. "Due to balance of payments shock, which impinges domestic liquidity and depreciates Indian Rupee. With liquidity surplus vanished and large outperformance in 2022 we further lower exposure in BFSI," said Nuvama.
Apart from Fed, RBI’s actions too will be critical. Its rupee defence only exhausted that surplus, but did not tighten domestic financial conditions. However, that surplus has now vanished. An aggressive intervention by the RBI will plunge the system into a deficit. This could now weigh on domestic credit creation, as has been the case in the past crisis, it said.
Other market participants believe that liquidity and cash flow are likely to guide the banking sector in the near term but instances like Credit Suisse or SVB happening in India is highly unlikely, considering the strict regulatory mechanism in the country by the RBI. Liquidity is the key but the Indian banking system is immune from such a crisis as the business model of banks in India is completely different, said Kranthi Bathini, Director Research at WealthMills Securities. "Indian banking system is highly insulated and highly regulated across the world"
He suggested that one should look at large-cap banking names, both public and private, which can make the most of a high-interest rate regime.
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