Budget: Banking and financial stocks clock best gains in 10 months

MUMBAI: Banking and financial stocks surged Monday, their steepest climb in more than 10 months, after India proposed a bad bank to house loans gone sour. The proposed privatization of IDBI Bank and two others, yet unnamed, underscored the Centre’s intent to enhance efficiency in the financing industry that is crucial to undergird growth – and individual incomes.

Finance Minister Nirmala Sitharaman announced setting up an asset reconstruction company (ARC) and an asset management company (AMC) – potentially on the lines of bad banks in the West - to house toxic assets now denting bank books.

“The announcement of an ARC-AMC model can work like a bad bank and help the banking sector clean up the bad corporate loans,” said Abhijit Tibrewal, analyst, Reliance Securities. “That will make investors believe that some of the stressed banks can effectively leverage this to clean up and improve the asset quality of their books.”

Given the budget’s accent on boosting infrastructure, the bets are on lenders that will play key roles in bankrolling them. HDFC Bank and ICICI Bank are top picks for D-Street.

“Within the banking space, we expect the theme of ‘strong getting stronger’ to play out now,” Tibrewal said.

The move to privatize IDBI Bank and two others cheered the markets. Both Nifty Bank and Nifty PSU Bank rallied 8% each--their biggest single-day gains since April 7, 2020. IndusInd Bank and ICICI Bank shares jumped 12% each to their 52-week highs while State Bank of India and RBL Bank shares gained 10% each.

Besides setting up the bad bank, the government will also infuse Rs 20,000 crore into public sector banks as part of its recapitalisation plan.

“Bond yields will eventually go down with inflow of foreign funds, even though they have gone up due to higher government borrowings for funding deficits,” said Deven Choksey, MD, K R Choksey Shares.

The 10-year benchmark yield pierced the 6% mark for the first time this year on Monday, as the bond market’s reaction to the budget was more muted than that of the stock market. The guage closed at 6.08 percent.