HDFC Bank, Kotak Bank, SBI shares propel Bank Nifty to fresh record high after RBI proposes easier liquidity norms

HDFC Bank, Kotak Mahindra Bank, SBI, Canara Bank shares rallied on Tuesday, fuelling Bank Nifty index to another record high level. Gains in banking stocks came after the Reserve Bank of India (RBI) issued the final guidelines on the liquidity Coverage Ratio (LCR) with more lenient rules than initially proposed.

Bank Nifty index surged more than 1%, extending its bull run for the sixth consecutive session. Canara Bank, Bank of Baroda, Kotak Mahindra Bank and HDFC Bank shares were the top gainers on the banking index, rallying more than 2% each. State Bank of India (SBI), Punjab National Bank (PNB) and Federal bank shares followed with over 1% gain each.

Rally in banking stocks was propelled by easier than expected liquidity norms issued by the RBI. In a huge relief to the banking system, the banking regulator allowed commercial banks to set aside a lower stock of liquid assets against deposits raised through digital channels, in the event of a potential run on banks.

What LCR Guidelines Say?

In the final guidelines on liquidity coverage ratio (LCR) released on April 21, RBI has assigned lower additional run-off of 2.5%, as compared with 5% in the draft, to digitally enabled retail or small business deposits.

Stable retail deposits enabled with internet and mobile banking (IMB) will have a 7.5% run-off factor, and less stable deposits will have a 12.5% run-off factor, as against 5% and 10% respectively, prescribed currently.

Wholesale deposits from legal entities including trusts, educational institutes, partnerships, LLP will have a lower run-off of 40% from 100%. This benefit was not part of the draft but has been introduced in the final guidelines.

Level 1 HQLA in the form of G-secs shall be valued at an amount not greater than their current market value, adjusted for applicable haircuts.

Impact on Banks

Analysts believe that the norms are positive for the entire banking sector. The RBI has already indicated that the updated framework could raise the system-level LCR by 6%, implying that most banks could see a 3-9% improvement in their individual LCRs — making the move broadly beneficial.

“The revised LCR norms are more relaxed than the earlier draft, benefiting banks with a lower share of retail deposits and a higher proportion of eligible wholesale deposits. In this context, we believe AU Small Finance Bank, RBL Bank, and IndusInd Bank stand to benefit the most, given their relatively lower retail deposit base, brokerage firm Motilal Oswal Financial Services said.

While public sector banks (PSBs) were already maintaining strong LCRs and were less impacted by the earlier draft, the revised norms will still support their ability to deploy surplus liquidity into the market, it added.

The brokerage firm maintains positive view on the banking sector, with ICICI Bank, HDFC Bank, SBI, and AU Small Finance Bank as its top picks.

Kotak Institutional Equities expects a 2-3% point lower deposit requirement if LCR is moved back to current levels.

“This would imply that banks can accelerate loan growth, lower deposit mobilization and cut deposit rates with greater confidence,” Kotak Equities said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.