India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Inflation still a dominant concern
Though the banking industry’s margins are expected to
decline due to a rise in the deposit rates, inflation remains
a dominant concern for them as it would lead to monetary
tightening and slower credit growth. Although inflation has
moderated due to a higher base and a decline in food
inflation, yet it remains higher than the Reserve Bank of India
(RBI)’s comfort levels. The RBI’s governor has also expressed
concerns on commodity-led inflation in the economy and plans
to revise inflation estimates in January 2011.
Banks’ earnings may come under pressure
We believe the earnings of banks may come under pressure
in case the monetary tightening of the RBI continues and
the liquidity overhang gets prolonged. Tight liquidity
conditions may lead to an increase in the funding costs
of banks while an increase in the yields would lead to
marked-to-market (MTM) losses for them.
Fundamentally strong banks preferred
We, therefore, believe banks with a strong deposit base,
better asset liability management and sound asset quality
offer a higher margin of safety. We prefer Axis Bank and
ICICI Bank among the private banks and Bank of Baroda
(BoB) and Punjab National Bank (PNB) among the public
sector banks.
Lagging deposit growth…
The relentless rise in price levels has caused the real
interest rates to turn negative, leading to a scenario in
which the deposit growth is considerably lagging the credit
growth. The credit growth stands at around 22% year on
year (YoY) currently while the deposit growth is
considerably lower at around 15% YoY. In our view, a slower
growth in deposits partly contributed to the tightening
of liquidity and increase in the deposit rates.
…coupled with a rise in key policy rates…
The RBI, during its November 2, 2010 policy review meet,
had hiked the key policy rates for the fifth time during
the financial year, taking the reverse repo and repo rates
to 5.25% and 6.25% from 3.5% and 5% respectively seen
at the beginning of the fiscal. The increase in inflation
has been the key reason behind the RBI’s tightening
measures. As inflation concerns have resurfaced led by a
surge in the crude prices, the RBI may further hike the
policy rates. The RBI’s governor has already indicated that
the central bank is targeting medium-term inflation at
about 4.5% and may revisit its inflation estimate in January
next year.
…prompting banks to go in for another round of
deposit rate hikes
Several banks have raised their deposit rates in the past
few days: State Bank of India (SBI; 50-125 basis points),
PNB (50-100 basis points) and Bank of India (25-100 basis
points). On an average, banks have raised deposit rate
by 150 to 200 basis points since June 2010.
Impact
Other banks likely to follow suit due to tight liquidity
scenario: The tight liquidity situation and the pick-up
in credit growth are likely to lead to heightened
competition amongst banks to garner deposits and
cause the other banks to also hike their deposit rates.
Lending rates likely to move up: Following the recent
hike in the deposit rates, banks are likely to raise their
lending rates as well. PNB and Kotak Mahindra Bank
have already raised their lending rates with PNB
announcing a 75-basis-point increase in its benchmark
prime lending rate (BPLR) and Kotak Mahindra Bank
hiking its both base rate and prime lending rate (PLR)
by 25 basis points each.
Marginal NIM compression likely: As the hike in the
lending rates is likely to lag the hike in the deposit
rates and as the extent of the lending rate hike is
likely to be lower than that of the deposit rate hike,
the net interest margins (NIMs) are likely to witness
some compression in the coming quarters. The extent
of the NIM compression would be around 20 to 30 basis
points and would be a function of several factors such
as the current account and savings account ratio, the
credit growth and asset liability management
mismatches.
Outlook
Though banks’ margins are expected to decline led by a
rise in the deposit rates, inflation remains the dominant
concern as it would lead to monetary tightening and
slower credit growth. In addition, the rising yields may
contribute to MTM losses for banks. Although inflation
has moderated due to a higher base and a decline in food
inflation, yet it remains higher than the RBI’s comfort
levels. Further, a speculative rise in crude prices may
revive the inflation fears, leading to monetary tightening
by the RBI.
We believe the earnings of banks may come under pressure
in case the monetary tightening continues and the liquidity
overhang gets prolonged. In addition, temporary
injections through statutory liquidity ratio exemptions
and deferment of borrowing could have a muted impact
on tight liquidity which may affect the credit growth and
margins of banks. Going forward, we believe an increase
in the deposit rates will improve the deposit growth while
the release of funds from government spending (likely
before the next budget) will ease liquidity. We, therefore,
believe banks with strong deposit base, better asset
liability management and sound asset quality offer a
higher margin of safety.
No comments:
Post a Comment