Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks: Seize the moment
Why we suggest buying now
We see signs of headwinds receding gradually over the next two-to-three months.
Subsequent to our downgrade of the sector in October (refer to our note “Time to
book profit” dated 8 October 2010) on concerns of a widening gap between credit
growth and deposit growth, we are already seeing signs of liquidity improving to
more comfortable levels over the next two-to-three months. Deposit growth is
picking up (16.4% as per the latest RBI estimate, compared to 14% in early
October 2010) as deposit rates have increased 200-300bp across the system and
we expect the government’s surplus cash balance with the RBI to be recycled into
the banking system over the next two-to-three months. Inflation control and the
RBI’s pace of tightening remains uncertain, but we factor this in through NIM
contraction for our coverage universe and we increase our loan-loss provisions
(LLPs) assumptions to account for any possible spike in credit costs. Catching the
bottom is anybody’s guess, but we see attractive valuations across the sector
now. Thus, we are recommending to selectively buy into the sector.
Key recommendation changes
We are upgrading State Bank of India (SBI), Punjab National Bank (PNB) and
Bank of Baroda (BOB) to BUY (from Hold), and Bank of India (BOI) to HOLD
(from Reduce). We are retaining BUY on Axis Bank, ICICI Bank, IndusInd Bank,
Yes Bank and Development Credit Bank. We retain our HOLD ratings on HDFC
Bank and Union Bank of India. Among the NBFCs, we retain our BUY ratings on
IDFC, Reliance Capital and Power Finance, and HOLD on HDFC. See Exhibit 16
for details on our target price changes.
Sector outlook and valuations
For our coverage universe, we are factoring in average loan growth of 20% and
NIM compression of 20-30bp for FY12. We are increasing our LLP assumptions
for most of our coverage universe to account for any possible credit-cost spikes,
despite the credit-cost cycle having peaked for the sector. LDR is outlined in
Exhibits 3-13, and we see no significant cause for concern as we move into FY12.
Coming to valuations, the sector has corrected 15% since October 2010, and
many of the banks are trading close to their five-year mean P/E levels. ICICI
Bank, Axis Bank and SBI are our top picks for their excellent deposit franchises.
Key risks: Aggressive monetary tightening by the RBI and escalation in geopolitical
risks, leading to fund outflows from India.
Headwinds to tailwinds
We recognise that many headwinds have yet to be resolved for the sector, but
valuations are beginning to look attractive. We refer back to our downgrade note on the
sector, “Time to book profit”, of 8 October 2010 regarding concerns over the widening
credit-deposit ratio and the impact of a deteriorating liquidity situation on sector funding
costs and hence valuations. Liquidity is still tight but we expect it to be resolved over the
next two-to-three months as government spending begins to recycle funds from a
surplus with the RBI back into banking sector deposits. Our discussions with senior RBI
officials indicate that the central government’s spending is on track and this is evident in
the improving liquidity adjustment facility (LAF) deficit over the past three-to-four
months.
Deposit growth is picking up as deposit rates have increased 200-300bp across the
system. Deposit growth increased to 16.4% y-y as of early January 2011, from 15% in
early October 2010.
The LAF deficit, which was almost zero on 5 October 2010, hit a peak of INR1.7t (about
3.5% of net demand and time liabilities – NDTL) on 22 December 2010. The improving
deposit growth in the past two months has substantially improved the LAF deficit, which
was INR0.75t (about 1.5% of NDTL) as of 9 February 2011. The RBI is comfortable with
a LAF deficit/surplus in the range of 1% of NDTL, and our discussions with the RBI
indicate that this scenario is likely to pan out in the next two-to-three months.
In our view, inflation and the uncertainty surrounding the RBI’s pace of tightening in the
coming months is the other headwind facing the sector now. Our regional economics
team expects the RBI to hike the policy rate by 75bp over 2011 (refer note, “Eye of the
Tiger”, dated 24 December 2010). Here again our discussions with a retired Deputy
Governor of the RBI suggest the central bank will not resort to aggressive tightening at
this stage but may continue with multiple small rate hikes over the next two-to-three
quarters.
Oil prices could spike further from the already elevated levels on geopolitical
uncertainty. If this happens, we believe it would impact the banking sector in two ways:
increase short-term working capital demand from corporates on rising commodity prices
and, on a secondary level, compress valuation multiples. While the rising commodity
prices should lead to an increase in demand for working capital loans, our discussions
with some banks indicate that they are yet to hit the stage where the appetite for credit
would get killed by high interest rates. As the following chart illustrates, the stock-tosales
ratios indicate that corporates would need to restock their inventories at the
current levels (going by the recent historical levels) and we see no significant risk to our
coverage average loan growth estimate of 20% for FY12.
Bulk of the long-term loan demand last year came from infrastructure projects, mostly
power and transportation. Several state electricity boards are in cash losses – the
aggregate estimated cash loss is about INR2,000b – as they have been procuring
power at the high market prices from power producers, but are unable to pass on the
cost to consumers. Our discussions with major financiers to this sector indicate that
they have back-stop guarantees from the respective state governments, which would
prevent these exposures from becoming a NPL risk.
Will inflation spike GDP growth? Exhibit 2 details the incremental credit-deposit
equation for FY12, assuming fairly conservative estimates for real GDP growth,
inflation, government borrowing and deposit multiplier. Assuming a 8% real GDP
growth, inflation of 7%, government fiscal deficit of 5% and a deposit multiplier of 1.3x,
we estimate an average loan growth of 15.7% in FY12 for the sector, which seems
reasonable.
Given the tardy deposit growth over the last few quarters, the loan-to-deposit ratios
(LDR) have deteriorated across our coverage universe. The following section details
static LDR and incremental LDR across our coverage universe. As the incremental LDR
analysis indicates, incremental LD ratios can improve fairly rapidly as we have seen in
the past. Our discussions with the RBI corroborate our view as the central bank
believes this liquidity deficit is frictional and should correct itself soon as deposit growth
in the system recovers.
FII ownership and valuation multiples – Foreign Institutional Investors (FII) inflow has
been the key driver of banking sector outperformance in 2010, the banking sector
returned 32% compared to the Sensex of 17%. Given the concerns surrounding
inflation uncertainty, inadequate liquidity in the banking system, rising commodity prices
and other domestic governance issues, we have seen a pull-back of FII money from the
sector. As shown in the exhibits below, we have seen P/BV and P/E multiples correct to
more reasonable levels.
While we do not rule out the possibility of some more share-price downside for our
coverage universe, we do not intend to catch the bottom. As highlighted so far, we are
seeing signs of our earlier concern about the lack of liquidity correcting itself gradually
over the next few months. Also, we believe valuation levels have corrected to more
reasonable levels and we are changing our recommendation and target prices of stocks
in our coverage universe
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks: Seize the moment
Why we suggest buying now
We see signs of headwinds receding gradually over the next two-to-three months.
Subsequent to our downgrade of the sector in October (refer to our note “Time to
book profit” dated 8 October 2010) on concerns of a widening gap between credit
growth and deposit growth, we are already seeing signs of liquidity improving to
more comfortable levels over the next two-to-three months. Deposit growth is
picking up (16.4% as per the latest RBI estimate, compared to 14% in early
October 2010) as deposit rates have increased 200-300bp across the system and
we expect the government’s surplus cash balance with the RBI to be recycled into
the banking system over the next two-to-three months. Inflation control and the
RBI’s pace of tightening remains uncertain, but we factor this in through NIM
contraction for our coverage universe and we increase our loan-loss provisions
(LLPs) assumptions to account for any possible spike in credit costs. Catching the
bottom is anybody’s guess, but we see attractive valuations across the sector
now. Thus, we are recommending to selectively buy into the sector.
Key recommendation changes
We are upgrading State Bank of India (SBI), Punjab National Bank (PNB) and
Bank of Baroda (BOB) to BUY (from Hold), and Bank of India (BOI) to HOLD
(from Reduce). We are retaining BUY on Axis Bank, ICICI Bank, IndusInd Bank,
Yes Bank and Development Credit Bank. We retain our HOLD ratings on HDFC
Bank and Union Bank of India. Among the NBFCs, we retain our BUY ratings on
IDFC, Reliance Capital and Power Finance, and HOLD on HDFC. See Exhibit 16
for details on our target price changes.
Sector outlook and valuations
For our coverage universe, we are factoring in average loan growth of 20% and
NIM compression of 20-30bp for FY12. We are increasing our LLP assumptions
for most of our coverage universe to account for any possible credit-cost spikes,
despite the credit-cost cycle having peaked for the sector. LDR is outlined in
Exhibits 3-13, and we see no significant cause for concern as we move into FY12.
Coming to valuations, the sector has corrected 15% since October 2010, and
many of the banks are trading close to their five-year mean P/E levels. ICICI
Bank, Axis Bank and SBI are our top picks for their excellent deposit franchises.
Key risks: Aggressive monetary tightening by the RBI and escalation in geopolitical
risks, leading to fund outflows from India.
Headwinds to tailwinds
We recognise that many headwinds have yet to be resolved for the sector, but
valuations are beginning to look attractive. We refer back to our downgrade note on the
sector, “Time to book profit”, of 8 October 2010 regarding concerns over the widening
credit-deposit ratio and the impact of a deteriorating liquidity situation on sector funding
costs and hence valuations. Liquidity is still tight but we expect it to be resolved over the
next two-to-three months as government spending begins to recycle funds from a
surplus with the RBI back into banking sector deposits. Our discussions with senior RBI
officials indicate that the central government’s spending is on track and this is evident in
the improving liquidity adjustment facility (LAF) deficit over the past three-to-four
months.
Deposit growth is picking up as deposit rates have increased 200-300bp across the
system. Deposit growth increased to 16.4% y-y as of early January 2011, from 15% in
early October 2010.
The LAF deficit, which was almost zero on 5 October 2010, hit a peak of INR1.7t (about
3.5% of net demand and time liabilities – NDTL) on 22 December 2010. The improving
deposit growth in the past two months has substantially improved the LAF deficit, which
was INR0.75t (about 1.5% of NDTL) as of 9 February 2011. The RBI is comfortable with
a LAF deficit/surplus in the range of 1% of NDTL, and our discussions with the RBI
indicate that this scenario is likely to pan out in the next two-to-three months.
In our view, inflation and the uncertainty surrounding the RBI’s pace of tightening in the
coming months is the other headwind facing the sector now. Our regional economics
team expects the RBI to hike the policy rate by 75bp over 2011 (refer note, “Eye of the
Tiger”, dated 24 December 2010). Here again our discussions with a retired Deputy
Governor of the RBI suggest the central bank will not resort to aggressive tightening at
this stage but may continue with multiple small rate hikes over the next two-to-three
quarters.
Oil prices could spike further from the already elevated levels on geopolitical
uncertainty. If this happens, we believe it would impact the banking sector in two ways:
increase short-term working capital demand from corporates on rising commodity prices
and, on a secondary level, compress valuation multiples. While the rising commodity
prices should lead to an increase in demand for working capital loans, our discussions
with some banks indicate that they are yet to hit the stage where the appetite for credit
would get killed by high interest rates. As the following chart illustrates, the stock-tosales
ratios indicate that corporates would need to restock their inventories at the
current levels (going by the recent historical levels) and we see no significant risk to our
coverage average loan growth estimate of 20% for FY12.
Bulk of the long-term loan demand last year came from infrastructure projects, mostly
power and transportation. Several state electricity boards are in cash losses – the
aggregate estimated cash loss is about INR2,000b – as they have been procuring
power at the high market prices from power producers, but are unable to pass on the
cost to consumers. Our discussions with major financiers to this sector indicate that
they have back-stop guarantees from the respective state governments, which would
prevent these exposures from becoming a NPL risk.
Will inflation spike GDP growth? Exhibit 2 details the incremental credit-deposit
equation for FY12, assuming fairly conservative estimates for real GDP growth,
inflation, government borrowing and deposit multiplier. Assuming a 8% real GDP
growth, inflation of 7%, government fiscal deficit of 5% and a deposit multiplier of 1.3x,
we estimate an average loan growth of 15.7% in FY12 for the sector, which seems
reasonable.
Given the tardy deposit growth over the last few quarters, the loan-to-deposit ratios
(LDR) have deteriorated across our coverage universe. The following section details
static LDR and incremental LDR across our coverage universe. As the incremental LDR
analysis indicates, incremental LD ratios can improve fairly rapidly as we have seen in
the past. Our discussions with the RBI corroborate our view as the central bank
believes this liquidity deficit is frictional and should correct itself soon as deposit growth
in the system recovers.
FII ownership and valuation multiples – Foreign Institutional Investors (FII) inflow has
been the key driver of banking sector outperformance in 2010, the banking sector
returned 32% compared to the Sensex of 17%. Given the concerns surrounding
inflation uncertainty, inadequate liquidity in the banking system, rising commodity prices
and other domestic governance issues, we have seen a pull-back of FII money from the
sector. As shown in the exhibits below, we have seen P/BV and P/E multiples correct to
more reasonable levels.
While we do not rule out the possibility of some more share-price downside for our
coverage universe, we do not intend to catch the bottom. As highlighted so far, we are
seeing signs of our earlier concern about the lack of liquidity correcting itself gradually
over the next few months. Also, we believe valuation levels have corrected to more
reasonable levels and we are changing our recommendation and target prices of stocks
in our coverage universe
No comments:
Post a Comment