Banks on fire, SBI up 5%; bond yields dip 6% on RBI norms

Moneycontrol Bureau

Banks shares are skyrocketing in early trade Wednesday while the 10-year bond yields fell by 6 percent after several measures announced by the Reserve Bank of India (RBI) to arrest dip in long term bond yields and shielding banks from incurring financial losses due to declining bond prices.
BSE Bankex rallied more than 5 percent to 11041.46, continuing previous day's upmove as country's largest lender State Bank of India gained over 5 percent. Private sector lenders ICICI Bank, HDFC Bank and Axis Bank were up 3-6.5 percent.
The 7.16 percent 2013, 10-year bond yields dropped by 6.15 percent to 8.34 percent, but Indian rupee fell by 11 paise to 63.36 against the US dollar depsite several measures by the RBI.
The central bank announced open market operations and allowed banks to shift a part of their available for sale (AFS) bond portfolio to held to maturity (HTM).
RBI will conduct an open market operation (OMO) to purchase (not sell) government bonds of Rs 8,000 crore from the market on August 23, 2013.
"It is also important to ensure that the liquidity tightening does not harden long-term yields sharply and adversely impact credit flow to the productive sectors of the economy. RBI will thereafter calibrate them both in terms of quantum and frequency, as may be warranted by the evolving market conditions," RBI said in press release.
The measures will restrict a sharp rise in long-term yields and reduce mark-to-market (MTM) losses on banks' investment portfolios. Banks will benefit more from the reduction in MTM losses, with Oriental Bank of Commerce (up 9 percent) and Canara Bank (gained 6.66 percent) the biggest beneficiaries of these measures.
Lower wholesale rates will also benefit private banks like YES Bank (surged 15 percent). IndusInd Bank rallied 13 percent.
Brokerage firms have become bullish on bank stocks post RBI moves. Bank of America Merrill Lynch is expecting the banks to bounce 5-15 percent.
JP Morgan feels that India financials should bottom out on RBI's strong moves while CLSA says that this move is relief for banks, especially PSUs and wholesale funded banks.
JP Morgan says it would buy PSU banks like SBI, Bank of Baroda and Punjab National Bank for short-term, and longer-term preferred picks are ICICI Bank, HDFC Bank and SBI, it adds.
Bank of America Merrill Lynch recommends a buy rating on ICICI Bank and YES Bank while CLSA's top picks are ICICI Bank, Axis Bank and IndusInd Bank.