Banks face severe pressure, says analysts

The banking sector across the world is under severe pressure due to the fallout of several banks, including Signature Bank, Silicon Valley Bank and Credit Suisse. Banking stocks have been unable to rebound from the 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 gone up due to a crisis of confidence following the failure of the Silicon Valley Bank.

Analysts believe that the sentiments for the banks may be feeble in the long-term, but the long-term story is healthy and intact. In the near-term, measures have been put in place after the great financial crisis to limit contagion risk.

The analysts believe that neither the valuations nor the profitability will guide the sentiments for the banking sector. It will be driven by cash flows and liquidity.

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 the crisis, we expect the majority of counterparty exposures to be collateralised, so we don't 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 the sector's deposits and liquidity over the coming periods, as it will be important, it added.

Global banks' caving is sending shockwaves across markets. In the year 2023, this is likely to keep global markets on the boil with large spillovers on Indian equities, said Nuvama Institutional Equities. Unlike 2022, domestic demand leaves much to be desired and liquidity is no longer in surplus. It said that the focus must be on cash flows rather than valuations, and it increased its underweight rating on banking, financial services and insurance sector.

Due to balance of payments shock, it impinges domestic liquidity and depreciates Indian Rupee. With the liquidity surplus vanished and large outperformance in 2022, we have a lower exposure in the BFSI, said Nuvama.

RBI's actions will be critical as well as the actions of the Fed. Its rupee defence did not tighten domestic financial conditions, but it only exhausted that surplus. The surplus has now vanished. An aggressive intervention by the RBI will plunge the system into a deficit. It said that this could affect domestic credit creation, as has been the case in the past crisis.

Some market participants believe that liquidity and cash flow will 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.

Kranthi Bathini, Director of Research at WealthMills Securities said that the Indian banking system is immune to such a crisis and the business model of banks in India is completely different. The Indian banking system is highly insulated and highly regulated around 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.