We are observing selling in US banks after imposition of Financial Transaction Tax. One more reason could also be the ban on short selling in Europe. As Global Investors cannot benefit from shorting their banking positions in Europe, they might be hedging their global risk by shorting Banks in US.
Is the impact percolating down to India as well? It seems so. The last two trading sessions have seen huge additions of Open Interest in Bank Nifty, as also in almost all Banking Stock futures combined with sharp erosion in price.
Banks have also suffered due to incessant rate hikes by the Reserve Bank of India. Rising Non Performing Assets and slowing credit growth are also hurting the balance sheets of domestic lenders.
SCRIPT | C/P | OI Addition in last two days | HIGH/LOW of Settlement | |
Bank Nifty | 9954 | 17 % | 10967/9954 | |
AXIS BANK | 1173 | 14 % ( 17% yesterday) | 1256/1173 | |
BOB | 792 | 20 % | 873/792 | |
CANBANK | 431 | 17 % | 476/429 | |
BHANBANK | 83.1 | 5 % | 98/83 | |
ICICIBANK | 912 | 6 % (8% yesterday) | 1047/912 | |
INDUSINDBANK | 247.2 | 18 % | 274/247 | |
OBC | 315 | 7 % | 354/315 | |
SBIN | 2175 | 25 % in last 4 days | 2356/2175 | |
PNB | 1028 | 18 % | 1123/1028 |
These stocks may give some bounce back if global market conditions are good. That should be good opportunity to go short again with stop loss or an options hedge.
Do You Know?
Traditionally "equity investments" have been considered as long term investments. However, most of us are hard-wired to think short term and "instant gratification" is the norm in the world we live in.
Every investor we come across asks us the question how long is "Long Term"? Though there is no definite answer, we can highlight the benefits of long term investment through the following synopsis. Analyzing the Rolling Returns of BSE Sensex over the last 15 years, following have been the observations:
Traditionally "equity investments" have been considered as long term investments. However, most of us are hard-wired to think short term and "instant gratification" is the norm in the world we live in.
Every investor we come across asks us the question how long is "Long Term"? Though there is no definite answer, we can highlight the benefits of long term investment through the following synopsis. Analyzing the Rolling Returns of BSE Sensex over the last 15 years, following have been the observations:
We trim SBI's FY12e and FY13e net profit forecasts on higher NPA provision assumptions. We retain a Sell as SBI's likely high credit costs would keep RoE lower than that of peers.
NIM expands, though further gains unlikely. NII rose 32.8% yoy, led by a 183bps rise in domestic credit-to-deposit to 76.7%.CASA share improved 38bps yoy to 47.9%, and grew 18.8% yoy. Due to a 44bps yoy rise in NIM to 3.62%, we raise our NII for FY12e and FY13e by 6.5% and 7.7%, respectively. Yet, given SBI's rising liability costs, particularly short-tenure deposits and a stretched credit-to-deposit, NIM has little scope for further gains.
Asset quality suffers, high slippages persist. Fresh slippages of `61.8bn (~3.4% of loans) indicate that asset quality is still suspect; ~20% of restructured loans (`37.3bn) are NPAs. We raise credit cost estimates by 12.2% and 9.9% in FY12e and 13e, respectively, due to likely high defaults. SBI's management estimates net NPAs of 1.5% by end-FY12. We expect this to be attained through higher NPA provisions, rather than lower incremental slippages.
Low capital adequacy necessitates infusion. Tier-1 capital is now a low 7.6%, making capital infusion paramount for business growth. Management expects the government to infuse capital via a rights issue in FY12, but the quantum is still not finalized.
First they cut the rating of the US, then the went and downgraded Google, now S&P is going for the "treason trifecta" by just releasing a report which literally takes the US to the toolshed. Among many other things, the rating agency just cut US growth for the next 3 years. To wit: "While July data finally showed a slight improvement in the U.S. economy, it's not enough to support expectations that the second half of the year will see a bounce in growth. We now expect to see an even slower recovery than the half-speed we earlier expected. We now expect just 1.9% growth in the third quarter and 1.8% in the fourth, to bring 2011 calendar year growth closer to 1.7% instead of 2.4% we earlier expected. We also downwardly revised growth expectations for 2012 and 2013, as a more drawn-out recovery is factored into our forecast." We wonder how soon before the realization that the US is in fact contracting will force S&P to downgrade America even further, a move which will force Moodys and Fitch to come up with a AAAA rating for the US in order to keep the weighted average rating at current levels. It gets even worse though as S&P now openly brings the 2008 analogy: "The markets' violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck. Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default. The low Treasury yields indicated that markets were expecting Congress to come to its senses and reach a deal. However, the wait and the last-minute deal, which left a lot to be desired, only increased worries that the government will do more harm than good. Confidence in the recovery and in U.S. policymaking has hit new lows. After U.S. sovereign debt lost its triple-A status and financial markets unwound, consumer confidence hit a 31-year low and manufacturing sentiment readings contracted." And the kicker: S&P, yes S&P, makes fun of the Fed, and specifically the "transitory" nature of the economic collapse: "Continued weak growth after sharply downward GDP revisions has made the "temporary argument" a less plausible explanation for the slew of bad news for the first half of the year. At least the GDP revisions make the persistently high unemployment rate make more sense. But the revised data also indicate a much weaker outlook than we previously expected. As the boosts from rebuilding inventories and fiscal stimulus unwound, consumer spending and housing couldn't cover the hole, because the former is still working off excess debts and the latter excess supply. The recovery comprised a first-half average growth of just 0.8%." And that is how you respond to endless scapegoating that now blames the S&P for the collapse. Look for S&P to make the FBI's most wanted list very shortly.
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Good thing the whole debt ceiling fiasco taught Tim Geithner a thing or two about being frugal, or else today's $28 billion increase in total debt to a new all time high of $14,615,567,348,203.71 may have been far, far worse. At least congress still has $127 billion in dry powder before it has to authorize the extension of the interim debt ceiling cap of $14.694 trillion. At this rate, total debt and US GDP will achieved parity in 4 months, and if the US actually contracts (negative GDP in Q2 and Q3) and enters recession, that will be one divergence spread we will never want to be on the compression side of.
No Licence for :Tatas, M&M, ADAG, AV Birla Group and L&T.
Indiabulls, Shriram Finance, Religare and Srei
Notwithstanding the finance ministry's initial prodding to go big on new bank licencing, the Reserve Bank of India (RBI) has got the ministry to toe its cautious line on how to expand the banking sector in India. The ministry and RBI have come to an understanding that big corporate houses ought not to be allowed to enter the banking business at this juncture.
The move is in recognition of the risk to banks' integrity from the corporates' other business interests and the paramountcy of maintaining domestic financial stability in times of global crisis.
Official sources said a maximum of four new banks would be allowed and these would be promoted by pure-play NBFCs subject to the central bank's strict eligibility criteria. There would also be a condition that promoter holding in the bank, to be set at 40 per cent initially, would be reduced within a rather tight time-frame. The move dashes the banking hopes of corporate majors like Tatas, M&M, ADAG, AV Birla Group and L&T. As the definition of "big industrial/business house" is ambiguous, the fate of even other aspirants such as Indiabulls, Shriram Finance, Religare and Srei is rather uncertain because they, too, have significant cross-holdings in group firms. The new licences would likely be available for institutions like IFCI
"It (deciding if any applicant has significant interests in other group businesses which may impact the integrity of the bank) should be an objective test, rather than one of perception," said Hiresh Wadhwani, partner (financial services), Ernst & Young.
Currently, banks are allowed to have an aggregate 74 per cent foreign holding with a cap of 5 per cent for a single investor. For new licensees, the policy will be stricter, with aggregate foreign holding cap (including FDI, NRI and FII) at 49 per cent, with a condition that a non-resident won't hold than more than 5 per cent of paid-up capital. The minimum paid-up capital could be set at Rs 500 crore, compared to Rs 300 crore for existing banks, sources said.
The new banks will have to mandatorily open a certain number of branches in rural and semi-urban areas. This is to honour the government's objective of financial inclusion, even as the country's banking system grows in size and sophistication to meet the needs of a modern economy.
A top source said the finance ministry has formally conveyed to the RBI its willingness to accept the central bank's views on having a calibrated, rather than sudden, expansion of India's private banking sector. The RBI will soon announce its guidelines for new banking licences.
The RBI's move to not let "promoter groups" (read big industrial and business houses) into banking would look like a climb-down from the position it took in a recent note to the finance ministry. In the note, the central bank had summarised its views on new bank licences and foreign shareholding in Indian banks, following the August 2010 discussion paper and comments received on the same. The RBI had spoken in favour of allowing big corporate groups to set up banks through the wholly-owned NOHC route.
FE
Cautious Move
* The finance ministry and RBI have come to an understanding that big corporate houses ought not to be allowed to enter the banking business at this juncture
* Sources say a maximum of four new banks will be allowed and these will be promoted by pure-play NBFCs
* The move dashes the banking hopes of majors like Tatas, M&M, ADAG, AV Birla Group and L&T
* The fate of aspirants such as Indiabulls, Shriram Finance, Religare and Srei is also rather uncertain
Another example of investigative report for those who wants to cover their company better
[Note that this report was published on Alfredlittle.com this morning but many
users failed to receive an email notification. We apologize for any
inconvenience.]
Termination Patterns Brewing in Brazil, Russell 2000, and the S&P 500
The action of the last few days has created rising bearish wedges in Brazilian ETF, S&P 500, and the Russell 2000.
Let's start with Brazil as it's become THE international "risk" market, leading all the other BRIC countries in the market (Brazil is blue, Russia green, China red, and India purple).
With that in mind, have a look at Brazil's ETF which is forming something of a rising bearish wedge pattern. This is a termination pattern which means when it breaks it will likely be down and wipe out most of the gains of the last week.
Now, this pattern does have a bit of upside left in it. But we could just as easily take out the bottom trendline in which case, we're on our way to new lows.
In the case of the S&P 500, this pattern is far more pronounced and rapidly nearing its apex.
As for the Russell, we're right at the apex.
When you combine these patterns with the light volume that has occurred throughout this latest move upwards as well as the fact it's moving on rumors (seriously, Eurobonds? You think Germans are going to support this?), we're very likely going to see a reversal in the near future culminating in new lows for the year.
Remember, while all the focus is on the Fed and its response to the markets, the US economy continues to worsen. This morning's Empire Manufacturing numbers were terrible. Add to this the recent market rout (which will impact sentiment surveys going forward) as well the all but guaranteed terrible 3Q earnings we'll be seeing soon, and we've got a real economic downturn on our hands.
And people are viewing stocks as a great buy today?
We went for this same scheme back in 2008. At that time the US economy was clearly breaking down, the banking system was collapsing, and yet people were buying every dip and viewing every negative announcement with rose colored glasses.
