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Taking a breather, negatives surround…
Banking stocks corrected across the board on the PSU banks ‘bribery for
loans’ scam, 2G and MFI loans, liquidity concerns and rising G-Sec yields.
However, one has to take a call on whether the sector will keep correcting
further. We believe the sector will continue to remain under pressure in
the near term where stocks may not give a sharp bounce-back but shall
remain around these levels until we are able to see a sharp uptick in credit
and deposits growth alongside pressure on yields easing off
The recent bribery for loans scam concern, mounting pension liabilities
remain an overhang on the sector. We expect a reduction in valuation
multiples of PSU banks, particularly midcap PSU banks. Their range of
1.5x-2x may shift to 1.4-1.8x. We recommend investors buy large cap
stocks like HDFC Bank (higher CASA and corrected), Bank of Baroda
(strong asset book) and, among other midcaps, Oriental Bank of
Commerce (cheap valuation) and Development Credit Bank (sharp
correction and turning profitable) in the current market conditions.
Tight liquidity, rising interest rates: Higher CASA ratio to provide buffer
We have seen interest rates on the deposits side, money markets, etc.
inching up at a much faster pace on account of continued liquidity
shortfall. Banks remained net borrowers from the RBI of around | 1 lakh
crore on an average basis under the LAF window. Advance tax outflows
around | 4000-5000 crore should create further pressure. In such a
scenario, short-term paper rates are going up and banks with higher
CASA and large caps like HDFC Bank, State Bank of India and Bank of
Baroda will be able to ride the wave better and protect NIMs.
Government deposits lying with the RBI have risen to | 43500 crore (as of
November 26, 2010) near its yearly peak mainly on account of advance
tax and divestment proceeds, all lying with them. In contrast, government
spending has not risen leading to money not flowing back to the system,
keeping liquidity tight. The open market purchase of | 12000 crore
government bonds on December 15 will reduce the excessive spurt in
interest rates on the last day of advance tax.
Currently, the one year rate in the bulk deposit market, for | 1 crore and
above, is hovering around 9.2%-9.4%. Even commercial paper rates are
currently at peaks of 9.2%. However, for retail deposits, these rates are
still far off. Recently, SBI raised rates by 50-100 bps for deposits in the
one to two year bracket. We believe banks will now raise deposit rates
faster than anticipated and 9-10% range for one year retail deposit rates
can be seen in the next six months as credit growth at 20% will require
resources to be raised via deposits.
Credit growth pick-up to put extra pressure on resources from Q3FY11E
The industry wide scenario of credit growth at 22.6% surpassing deposits
growth at 14% (November 26, 2010) has led to an increase in the C/D
ratio from 73% to 74%. We believe that on a high base of Q4FY10, credit
growth will be slightly lower leading to overall FY11E credit growth
coming down to around 19-20%. This may not allow larger banks to show
high credit numbers for year-end and that too from limited resources.
Consequently, we believe a steep rally in banking stocks is not visible
from here on.
…..all this to lead to NIM compression from peak levels
Most banks reached peak NIMs in Q2FY11 mainly due to the full impact of
earlier deposit repricing and implementation of base rate taking effect
along with no incremental deposits rise. The phenomenon cannot
continue in the same way. Also, the increase in deposit rates and slower
credit is leaving banks slightly under stress from increasing lending rates
across board. Therefore, we believe NIMs are estimated to dip by 10-15
bps for most banks in the coming quarter. Even here, banks with higher
reliance on wholesale deposits will face the heat e.g. Yes Bank,
Dhanlaxmi Bank, IDBI Bank and Oriental Bank.
On account of these factors, we believe another rate hike in repo and
reverse repo rates may not be coming in the monetary policy meet on
December 16, 2010. Just as the SLR window of allowing non -maintenance up to 2% of NDTL was opened, other open market
operations may be resorted to for easing off liquidity
Rising G-Sec yields to hit treasury profits of banks
Investment book comparison of banks makes us believe that the current
rise in yields beyond 8% will result in MTM losses for banks and PSU
banks will have to provide for the same. Treasury gains are definitely not
seen in the next couple of quarters leading to non interest income of
banks growing in line with business only.
The ICICIdirect.com coverage universe suggests that Oriental Bank of
Commerce and Axis Bank are affected the most while banks like Punjab
National Bank, Bank of Baroda in the public sphere and HDFC Bank and
South Indian Bank from the private space are well protected from MTM
hit in case of rising G-sec yields.
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