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Banks
The final countdown
Deposit growth continues to lag behind loan growth. A 50-75bp hike in deposit
and lending rates from here on will likely dampen demand for loans and push up
deposit growth, translating into a more balanced scenario. We turn cautiously
optimistic on the sector following its recent stock-price correction.
Further deposit rate hikes on the cards; when will loan growth slow?
Deposits with Indian banks in general grew 16.4% yoy for the fortnight to 14 January
2011 (vs 17.0% yoy for the fortnight to 15 January 2010) while loans grew 23.6% yoy during
the same period (vs 13.9% yoy last year). The year-to-date deposit growth was about 10%
compared to loan growth of 14.6%. Also, the average loans-to-deposits ratio (75-76% as of
14 Jan 2011) appears to be close to its technical peak (see Chart 4). We believe further rate
hikes are on the cards. Base rates for lending are now 9.0-9.5% (see Chart 5) and we
believe a further 50-75bp hike in lending rates would moderate the incremental demand for
loans. One-year term deposit rates are now 8.25-8.50% and we believe a 50-75bp hike in
deposit rates would likely lead to acceleration in deposit growth.
Macro headwinds continue; liquidity remains tight
A combination of high inflation, widening trade deficit and fiscal deficit is straining domestic
liquidity. Indian banks borrowed about Rs786bn net under the repo window from the RBI as
of 2 February 2011 (see Chart 1). They have been the central bank’s net borrowers to the
tune of about Rs900bn daily on average in the year to date.
Wholesale borrowing cost for a year is close to 10%, with a flat yield curve
The 12-month certificate of deposit (CD) rate has risen to 9.98% (+380bp yoy) and the threemonth CD rate has risen to about 9.65% (+490bp yoy). On a yoy basis, short term deposit
rates have risen faster than the long-term rates (see Chart 3). In general, a sustained
flattening of the yield curve puts pressure on NIMs. The gap between the 12-month CD rate
and the benchmark deposit rate (ie, the SBI one-year deposit rate) is about 150-160bp (see
Chart 2), which is likely to lead to further hikes in term deposit rates.
We turn cautiously optimistic on the sector and see value in select stocks
Going forward, a combination of rising deposit growth and a moderation in loan growth will
lead to a more balanced scenario. Since 1 November 2010, the Bank Nifty index (CNXBANK
Index) has declined 18% compared to an 11% fall in the Nifty Index. Given the stock-price
correction and our expectation that the gap between deposit growth and loan growth will
narrow, we turn cautiously optimistic. As earlier, we continue to prefer public sector banks
(PSBs) over private sector (PSBs trading at about 1.0-1.7x FY12F book value and 6.0-9.0x
earnings). Our top picks among the PSBs: SBI, PNB and BOB. Among private-sector banks,
we retain our Buy rating on HDFC Bank, Hold on ICICI Bank and Sell on Axis Bank. Within
NBFCs, we keep our Buy on IDFC, Hold on Power Finance and Sell on HDFC Limited.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks
The final countdown
Deposit growth continues to lag behind loan growth. A 50-75bp hike in deposit
and lending rates from here on will likely dampen demand for loans and push up
deposit growth, translating into a more balanced scenario. We turn cautiously
optimistic on the sector following its recent stock-price correction.
Further deposit rate hikes on the cards; when will loan growth slow?
Deposits with Indian banks in general grew 16.4% yoy for the fortnight to 14 January
2011 (vs 17.0% yoy for the fortnight to 15 January 2010) while loans grew 23.6% yoy during
the same period (vs 13.9% yoy last year). The year-to-date deposit growth was about 10%
compared to loan growth of 14.6%. Also, the average loans-to-deposits ratio (75-76% as of
14 Jan 2011) appears to be close to its technical peak (see Chart 4). We believe further rate
hikes are on the cards. Base rates for lending are now 9.0-9.5% (see Chart 5) and we
believe a further 50-75bp hike in lending rates would moderate the incremental demand for
loans. One-year term deposit rates are now 8.25-8.50% and we believe a 50-75bp hike in
deposit rates would likely lead to acceleration in deposit growth.
Macro headwinds continue; liquidity remains tight
A combination of high inflation, widening trade deficit and fiscal deficit is straining domestic
liquidity. Indian banks borrowed about Rs786bn net under the repo window from the RBI as
of 2 February 2011 (see Chart 1). They have been the central bank’s net borrowers to the
tune of about Rs900bn daily on average in the year to date.
Wholesale borrowing cost for a year is close to 10%, with a flat yield curve
The 12-month certificate of deposit (CD) rate has risen to 9.98% (+380bp yoy) and the threemonth CD rate has risen to about 9.65% (+490bp yoy). On a yoy basis, short term deposit
rates have risen faster than the long-term rates (see Chart 3). In general, a sustained
flattening of the yield curve puts pressure on NIMs. The gap between the 12-month CD rate
and the benchmark deposit rate (ie, the SBI one-year deposit rate) is about 150-160bp (see
Chart 2), which is likely to lead to further hikes in term deposit rates.
We turn cautiously optimistic on the sector and see value in select stocks
Going forward, a combination of rising deposit growth and a moderation in loan growth will
lead to a more balanced scenario. Since 1 November 2010, the Bank Nifty index (CNXBANK
Index) has declined 18% compared to an 11% fall in the Nifty Index. Given the stock-price
correction and our expectation that the gap between deposit growth and loan growth will
narrow, we turn cautiously optimistic. As earlier, we continue to prefer public sector banks
(PSBs) over private sector (PSBs trading at about 1.0-1.7x FY12F book value and 6.0-9.0x
earnings). Our top picks among the PSBs: SBI, PNB and BOB. Among private-sector banks,
we retain our Buy rating on HDFC Bank, Hold on ICICI Bank and Sell on Axis Bank. Within
NBFCs, we keep our Buy on IDFC, Hold on Power Finance and Sell on HDFC Limited.
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