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Liquidity has got tighter in the last couple of days. Given the fact that underlying loan growth
momentum is strong, we believe further deposit rate hikes may be on the cards. We continue
to remain cautious on the sector. We maintain Buy on HDFC Bank, SBI and Sell on HDFC
Limited, Axis Bank.
Liquidity continues to remain tight
Liquidity remains in deficit mode. The banks borrowed about Rs1,048bn net under the
repo window from RBI as on 18 January 2011 (see chart). They have been net borrowers
from RBI to the tune of a daily average of about Rs823bn from January 2011 to date.
Deposit growth continues to lag loan growth
Industry deposit growth was 16.5% yoy (+10.7% ytd in FY11) while loans grew 24.4%
yoy (+16.0% ytd in FY11), as of 31 December 2010.
Anecdotal evidence further suggests that underlying loan growth momentum is strong.
Note that deposit mobilisation had picked up steadily in the recent past, partly on account
of 100-150bp deposit rate hikes implemented by most banks since Aug-Sept 2010.
But, deposit growth still lags behind loan growth and loan-deposit ratios (75-76%) appear
close to cyclical peaks. We continue to believe that the emerging risk is a faster-thanexpected rise in the cost of deposits, which could act as a headwind for the sector in the
near term.
CD rates continue to remain elevated; flattening of the yield curve is a risk
The 3-month certificate of deposit (CD) rate has risen to about 9.2% (+140bp over the
last three months; +480bp yoy) and the 12-month CD rate has risen to 9.8% (+130bp
over the last three months; +370bp yoy).
The gap between the 12 month CD rate and the one-year deposit rate continues to
remain in the range of 125-150bps. Unless liquidity improves significantly, we believe that
this gap will lead to further increase in retail term deposit rates.
In general, a sustained flattening of the yield curve will put pressure on net interest
margins.
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