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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Financials Sector------------------------------------------------- Maintain MARKET WEIGHT
New report: Tide yet to turn
● In our new report, Tide yet to turn, published on 3 February 2011,
we argue that despite the sharp correction in the past few months
and robust 3Q11 results, it is still too early to overweight the
Indian financial sector.
● Indian banks’ 3Q performance was robust, driven by better
margins, declining credit costs, but loan deposit rations have been
strained further. We expect banks to further raise deposit rates to
accelerate deposit growth as well as moderate loan growth.
● Bond yields have not yet reacted to the sharp rise in deposit and
money market rates. With government borrowing needs likely to
be large even in FY12, which will need to attract a large share of
bank deposits, we expect upward pressure on deposit costs to
also translate to higher bond yields.
● With Tier I for most banks close to their comfort threshold of 8.5-
9% and internal capital generation lagging risk asset growth,
equity issuance of US$16 bn is on cards in 2011 (10-20% equity
dilution).
● With deposit rates still to peak and upward pressure on bond
yields and large equity issuance on cards this year (despite 12-
25% fall in the past few months), we maintain our market weight
stance on the sector. We prefer banks with strong capital – ICICI,
HDFC Bank
Robust 3Q performance, but LDRs now strained
Indian banks’ 3Q performance came in robust as expected. Aggregate
profit was up 24% YoY for the quarter on a 25% loan growth. Private
bank profit was up 33% YoY (in line), and state-owned banks’
earnings were up 19% YoY (above forecasts). Margins held up better
than expected, and a fall in treasury profit was offset by a moderation
in credit costs. Private banks registered a steep 51% YoY drop in their
loan loss provisioning on the back of an improvement in asset quality.
Over the past 12 months, incremental loan-to-deposit ratio for Indian
banks has been well over 100%, as loan growth (24% YoY) has
outpaced deposit growth (16% YoY). Consequently, system LDR has
jumped to a seemingly unsustainable 76% from 71%, its highest level
in the past decade. The RBI also believes these levels are stretched,
and we thus expect banks to address this by further raising deposit
rates to accelerate deposit growth as well as moderate loan growth.
Upward pressure on deposit rates and bond yields
Over the past few months, banks have raised deposit rates by 150-
300 bp owing to the tight liquidity environment. However, deposit
growth is still to meaningfully pick up, and the liquidity deficit remains
large at US$20-25 bn (in Jan 2011). Also, deposit rates are still low in
real terms and corporate loan demand is strong, as with rising
commodity prices working capital demand has also picked up. Thus,
we expect banks to go in for another round of rate hikes.
Moreover, long bond yields have not yet reacted to the sharp rise in
deposit and money market rates. With government borrowing needs
likely to be large even in FY12, it will need to attract a large share of
the banking system’s incremental deposits, the incremental spreads
on treasuries are negative and close to their historical low, as the long
bond yields have not yet kept pace with the rise in deposit rates. We
thus expect the upward pressure on deposit costs to translate into
higher bond yields in FY12. These potential MTM hits present an
additional risk to bank earnings, with a 100 bp increase in yields
eroding earnings by 5-15%. SBI and Union Bank are the most
vulnerable, given the long duration of their investment portfolios.
2011 – the year of capital raising
With Tier I ratios for most banks (except ICICI Bank and HDFC Bank)
now close to their comfort threshold of 8.5-9% and internal capital
generation lagging risk asset growth, we expect them to undertake
equity issuance in 2011. We estimate aggregate capital raising by
banks at US$16 bn – 10-20% equity dilution.
Indian bank stocks have corrected 12-25% over the past four months
on back of the increase in domestic inflation, interest rates and
concerns about margin pressures. However, despite the correction,
valuations are still not cheap relative to history. Government banks (at
1.4x book) are trading 1 SD above, and private sector banks (at 2.5x
book) are trading marginally above their historical average multiples.
In the current environment of rising rates and deposit accretion still not
accelerating, we believe banks with stronger deposit franchise,
relatively low LDRs and lower bond rate risk are better placed. ICICI
Bank, HDFC Bank and Axis are our top picks in the sector. SBI and
Yes Bank are our key UNDERPERFORM calls.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Financials Sector------------------------------------------------- Maintain MARKET WEIGHT
New report: Tide yet to turn
● In our new report, Tide yet to turn, published on 3 February 2011,
we argue that despite the sharp correction in the past few months
and robust 3Q11 results, it is still too early to overweight the
Indian financial sector.
● Indian banks’ 3Q performance was robust, driven by better
margins, declining credit costs, but loan deposit rations have been
strained further. We expect banks to further raise deposit rates to
accelerate deposit growth as well as moderate loan growth.
● Bond yields have not yet reacted to the sharp rise in deposit and
money market rates. With government borrowing needs likely to
be large even in FY12, which will need to attract a large share of
bank deposits, we expect upward pressure on deposit costs to
also translate to higher bond yields.
● With Tier I for most banks close to their comfort threshold of 8.5-
9% and internal capital generation lagging risk asset growth,
equity issuance of US$16 bn is on cards in 2011 (10-20% equity
dilution).
● With deposit rates still to peak and upward pressure on bond
yields and large equity issuance on cards this year (despite 12-
25% fall in the past few months), we maintain our market weight
stance on the sector. We prefer banks with strong capital – ICICI,
HDFC Bank
Robust 3Q performance, but LDRs now strained
Indian banks’ 3Q performance came in robust as expected. Aggregate
profit was up 24% YoY for the quarter on a 25% loan growth. Private
bank profit was up 33% YoY (in line), and state-owned banks’
earnings were up 19% YoY (above forecasts). Margins held up better
than expected, and a fall in treasury profit was offset by a moderation
in credit costs. Private banks registered a steep 51% YoY drop in their
loan loss provisioning on the back of an improvement in asset quality.
Over the past 12 months, incremental loan-to-deposit ratio for Indian
banks has been well over 100%, as loan growth (24% YoY) has
outpaced deposit growth (16% YoY). Consequently, system LDR has
jumped to a seemingly unsustainable 76% from 71%, its highest level
in the past decade. The RBI also believes these levels are stretched,
and we thus expect banks to address this by further raising deposit
rates to accelerate deposit growth as well as moderate loan growth.
Upward pressure on deposit rates and bond yields
Over the past few months, banks have raised deposit rates by 150-
300 bp owing to the tight liquidity environment. However, deposit
growth is still to meaningfully pick up, and the liquidity deficit remains
large at US$20-25 bn (in Jan 2011). Also, deposit rates are still low in
real terms and corporate loan demand is strong, as with rising
commodity prices working capital demand has also picked up. Thus,
we expect banks to go in for another round of rate hikes.
Moreover, long bond yields have not yet reacted to the sharp rise in
deposit and money market rates. With government borrowing needs
likely to be large even in FY12, it will need to attract a large share of
the banking system’s incremental deposits, the incremental spreads
on treasuries are negative and close to their historical low, as the long
bond yields have not yet kept pace with the rise in deposit rates. We
thus expect the upward pressure on deposit costs to translate into
higher bond yields in FY12. These potential MTM hits present an
additional risk to bank earnings, with a 100 bp increase in yields
eroding earnings by 5-15%. SBI and Union Bank are the most
vulnerable, given the long duration of their investment portfolios.
2011 – the year of capital raising
With Tier I ratios for most banks (except ICICI Bank and HDFC Bank)
now close to their comfort threshold of 8.5-9% and internal capital
generation lagging risk asset growth, we expect them to undertake
equity issuance in 2011. We estimate aggregate capital raising by
banks at US$16 bn – 10-20% equity dilution.
Indian bank stocks have corrected 12-25% over the past four months
on back of the increase in domestic inflation, interest rates and
concerns about margin pressures. However, despite the correction,
valuations are still not cheap relative to history. Government banks (at
1.4x book) are trading 1 SD above, and private sector banks (at 2.5x
book) are trading marginally above their historical average multiples.
In the current environment of rising rates and deposit accretion still not
accelerating, we believe banks with stronger deposit franchise,
relatively low LDRs and lower bond rate risk are better placed. ICICI
Bank, HDFC Bank and Axis are our top picks in the sector. SBI and
Yes Bank are our key UNDERPERFORM calls.
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