Bank stocks might slide more

With increasing digitalization, cybersecurity threats are a growing concern for the banking sector. Cyber-attacks can result in reputational damage, financial losses, and legal liabilities. Secondly, the banking sector is highly competitive, and banks may face challenges from new entrants such as fintech companies and other non-bank financial institutions.

All it seems, risks to financial stability have increased and called for continued vigilance although actions by advanced economies have calmed market stress. International Monetary Fund chief Kristalina Georgieva reiterated her view that 2023 would be another challenging year, with global growth slowing to below 3% due to scarring from the pandemic, the war in Ukraine and monetary tightening.

The change in the Regulatory has impacted the profitability and operational efficiency of banks. For example, increased regulation may lead to higher compliance costs and lower profitability, which has witnessed the collapse of US-based Silicon Valley Bank. A week on, a second US regional bank — Signature Bank — has been shut down, a third — First Republic Bank — has been propped up, Credit Suisse — has been averted after it was taken over by UBS. Recent stress in the banking sector and the possibility of a follow-on credit crunch brings the US closer to recession

Credit Suisse's troubles highlighted the risks faced by banks that engage in complex financial transactions, and the importance of effective risk management and oversight. Since all banks are interconnected, fears of banking contagion are impacting markets.

Thus far in calendar year 2023, the banking index has been an underperformer. Among stocks, State Bank of India and Punjab National Bank have been the worst hit - falling over 15% each in calendar year 23. At the same time, IndusInd Bank, Bank of Baroda, Bandhan Bank and Axis Bank have lost between 11% and 15% during this period, ACE Equity data show.

Given this present situation, banking stocks not only in India but globally, will underperform. We expect RBI to keep close watch on liquidity issues, counterparty exposures and intervene as necessary.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA