Macquarie: India Banks -Meeting with Treasury heads – key takeaways

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India Banks 
Meeting with Treasury heads – key takeaways  

Event
ƒ We met up with the head of treasury of some banks to get an update on the
current tightness in liquidity. Summarising some important takeaways below.

Impact
ƒ Liquidity expected to remain tight in the near term: Most of the treasury
heads were of the view that heading into 4Q liquidity would continue to remain
tight. The three main reasons cited were: 1) Low government spending; 2) No
foreign currency asset creation due to little intervention by the RBI in the FX
market, which has resulted in reserve money base being flat; 3) Large amount
of currency in circulation (currency with the public), due to lower opportunity
costs of holding money in an environment of high inflation, and depressed
deposit rates.

ƒ Liquidity situation could improve in 4Q but could remain in deficit mode:
The treasurers were confident that liquidity could improve in 4Q. Usually the
government has a year-end balance of Rs300-400bn with RBI implying there
could be additional spending to the tune of Rs500bn in 4Q as the current
balance is around Rs900bn. Also 4Q usually sees a current account surplus,
implying there could be some FX intervention (provided capital flows remain
at current levels) thereby resulting in an increase in the reserve money base.

The sharp deposit rate hikes done should also attract some deposits and
should aid in recovery of money multiplier. However, the treasury heads were
of the view that RBI would prefer liquidity to be in deficit mode and their stated
comfort factor of 1% of NDTL translates into Rs500bn of deficit where they
would be fine.

ƒ More deposit rate hikes to follow: Despite the sharp deposit rate hikes
done as well as improving liquidity situation in 4Q, another 50-100bps hike in
deposit rates can’t be ruled out as 4Q is a busy season for credit and banks
would be more desperate for deposits as this time around the deposit-loan
growth gap is unusually large.

ƒ NIM to be under pressure: Though lending rates have been hiked, deposit
rates have risen by much more. As a result, NIMs are likely to be under
pressure and a 15-20bps compression in NIMs is likely. NIMs have
possibly peaked at 2Q levels and the impact of the aggressive rate hikes
done will be felt in 4QFY11. Most likely NIMs will remain subdued/weak
for the next 3 quarters before they start recovering.

ƒ 10yr bond yields to remain range bound; CRR cut unlikely: 10yr bond
yields are likely to remain range bound around 8.1-8.2%. They don’t expect
RBI to do any CRR cut as inflation is still a concern for RBI.

Outlook
ƒ We maintain our cautious stance on the sector with relative preference for
private banks over state-owned banks. ICICI Bank (ICICIBC IN, OW, CMP
Rs1113, TP: Rs1400) is our top pick in the sector.