RBI moves: A step in the right direction:: Macquarie

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India Banks
RBI moves: A step in the right
direction
Event
 RBI raised the key benchmark rates by 25bps. The central bank also tweaked
provisioning and risk-weight norms for housing loans.




Impact
 Almost done with the rate tightening for the time-being: Though the
25bps hike was in line with our expectation, what came as a surprise was the
explicit statement by the RBI that the likelihood of further rate actions in the
immediate future is relatively low. RBI has held onto its M3 and loan growth
projections of 17% and 20%, respectively, for FY11E and its year-end inflation
forecast of 5.5% (under new series).
 Increase in risk-weights and provisioning – a positive move: We believe
the RBI’s decision to increase risk-weights for loans above Rs7.5m and raise
standard asset provisioning (general provisions) for teaser rate loans is good
for the health of banking system in the long run as it would be less profitable
for banks to push these products now. The teaser loan rate products did pose
a risk to the overall asset quality as RBI has clearly mentioned that many
banks have not taken into account the repayment capacity of the borrower at
“normal” lending rates.
 RoE of Rs7.5m mortgage product decreases by 600-1000bps: Our
calculations suggest that depending on the earlier risk-weight of 75% or
100%, the increase in risk-weights to 125% affects the RoE of this product by
600-1,000bps on a ceteris paribus basis.
 Increase in GP for teaser loan rates - negative mainly for SBI and HFCs:
Though the current increase in GP is applicable only to commercial banks, the
housing finance regulator tends to adopt the RBI norms with a lag. The impact
of the increase in GP provisions from 0.4% to 2% affects SBI the most among
the banks. BOB is the least-affected as it doesn’t have a teaser loan portfolio.
Though it affects HDFC Ltd earnings by 10% – even if the NHB adopts the
norms – HDFC Ltd’s management claims that they already have sufficient
excess provisions to take care of the impact.
 Proposed norms on CAR for Financial conglomerates – negative for
HDFC Ltd: The internal group on supervision of financial conglomerates has
proposed that investments in subsidiaries where the stake is greater than
20%(current limit is 30%) need to deduct 50% of the investments made
through Tier-1 and the other 50% through Tier-2. If that happens, HDFC Ltd’s
investments in HDFC Bank need to be deducted with the resultant impact on
HDFC Ltd’s CAR being close to 450bps. The tier -1 ratio would be affected by
230bps and would come down to 11.2%
Outlook
 We maintain our cautious stance on the sector with relative preference for
private banks over PSU banks. ICICI Bank is our top pick in the sector. In the
PSU space, we like BOB and PNB