RBS: Indian Banking – Sector data update (data as of 31 Dec 2010)

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Deposits increased Rs1,716bn in the fortnight ended 31 December 2010 (vs a Rs381bn decrease
in the previous fortnight). Deposit growth was 16.5% yoy as of 31 December 2010 (vs 17.6% yoy
as of 1 January 2010). 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.

Loans grew 24.4% yoy as of 31 December 2010 (vs 13.7% yoy as of 1 January 2010). Absolute
net loans grew Rs1,233bn in the fortnight ended 31 December 2010 (vs Rs453bn growth in the
previous fortnight).
Investments grew 2.3% yoy as of 31 December 2010 (vs 22.8% yoy as of 1 January 2010).
Liquidity remains in deficit mode. The banks borrowed about Rs808bn net under the repo window
from RBI as on 12 January 2011. They have been net borrowers from RBI to the tune of a daily
average of about Rs1,070bn from December 2010 to date. Investments by banks in mutual funds
totalled Rs245bn as of 17 December 2010 (the last reported date).
Deposit growth appears to be catching up steadily but still lags behind loan growth and loandeposit ratios appear close to cyclical peaks. We continue to believe that the emerging risk is a
faster-than-expected rise in the cost of deposits, which could act as a headwind for the sector in
the near term. The 3-month certificate of deposit (CD) rate has risen to about 9.0% (+170bp over
the last three months; +467bp yoy) and the 12-month CD rate has risen to 9.7% (+152bp over the
last three months; +375bp yoy). In general, a sustained flattening of this yield curve will put
pressure on net interest margins.
In a rising interest-rate scenario, we thus reiterate our Buy recommendations on banks with high
low-cost deposit ratios such as SBI (48% CASA ratio) and HDFC Bank (about 51% CASA). If
deposit rates rise sharply, we believe that non-banks will feel the pinch too: we reiterate our Sell
recommendations on HDFC Limited and Power Finance Corporation.