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Banks: F u r t h e r s e l l - o f f s , a n o p p o r t u n i t y t o a c c umu l a t e…
We are upbeat on the growth story of Indian financials over the longer
term. Keeping aside shorter term jitters over asset quality, rising rates and
tight liquidity, which is factored in correction of stock prices, the longer
term picture provides comfort and opportunities to build the portfolio.
We believe that we have now entered the final round of rate hikes but the
road could be a little long. External shocks of rising crude and commodity
prices pose a threat to longer sustainability of elevated rates. The
expectation of a contraction in NIM due to tight liquidity and falling CASA
share is factored in the price.
The question here is: Is the price correction more than warranted?
Yes, we probably stand with this argument that negative headwinds
would subside and investment opportunities such as these should be
grabbed with both hands.
With less than a month to go in FY11E, we see credit growth closing
above 20% against mild moderation expected by us earlier. For FY12E,
we expect the industry to post over 20% credit growth and reasonable
pricing power to stay with industry (blessed by full implementation of
base rate). Deposit mobilisation should pick up with rates currently
reaching double digits and equities on a beating. NIM is not expected to
show a major reversal from current levels although it is expected to
moderate by 15-20 bps in the coming quarter. We are upbeat on
profitability for the BFSI space. After the recent price correction,
valuations are again in the average zone.
In our study, we are trying to address two key questions;
• Is the asset quality cry overdone?
• Are banks adequately capitalised for near term growth?
From the I-Direct coverage universe, we like banks with a strong retail
franchise (helps in maintaining NIM) like HDFC Bank, Axis Bank, stable
asset quality (in case of slowing macro environment) like Bank of Baroda
and a strong growth story like Yes Bank. We would also bet on a
turnaround story like Development Credit Bank. We strongly believe that
such a steep correction in prices should be taken as an opportunity to add
quality stocks. We understand the near term headwind would be
overlooked by strong economic growth supporting business growth.
S e c t o r v i e w
There is visibility on topline (NII) growth for the banking space on the
back of healthy credit growth and deposit growth with a lag effect. The
credit cost is expected to moderate since many banks have reached their
mandated PCR and slippages are expected to moderate. This would lead
to healthy bottomline (PAT) growth of 18-20% in FY12E.
Mostly, the price correction in the past six months has brought most of
the banks back to historical multiples (which got expanded in Q2FY11).
Hence, this offers long-term portfolio building opportunities. We are
positive on HDFC Bank (consistent PAT delivery and clean asset quality),
Federal Bank (growth in sight, recoveries to step up), Dena Bank
(reasonable valuation and growth prospects), Bank of Baroda
(conservative and good asset growth) and DCB (a turnaround story).
C r e d i t g r o w t h n e e d s c a p i t a l … …
With GDP expected to grow at 8.5% for FY12E, we expect the industry to
clock credit growth of 20-22%. The concern over non-secular credit
growth seems to have taken a back seat and we are witnessing
widespread growth in the economy. We generally see a direct correlation
between GDP growth and credit offtake (~2.7-3.1x GDP growth), which
can be seen in Exhibit 1.
We understand that currently controlling inflation and inflationary
expectation is the central agenda for the RBI. Raising rates further could
hinder economic growth. Thus, a fine balance between both is desired by
the industry. GDP growth of 8.2% in Q3FY11 was an outcome of slowing
industrial growth, which was a lag effect of seven rate hikes already
announced so far. We believe such soft industrial activity will continue for
a few more months on account of rising investment cost. Our mediumterm horizon provides us more visibility and comfort on the consistent
growth story for the Indian financial space.
Our study shows that banks like IOB, Syndicate and UBI among PSBs
would be required to shore up their Tier I capital to support their balance
sheet growth for FY12E.
Banks like IOB and Syndicate Bank have the room to raise funds without
government support (because of higher government stake). However, UBI
would require government support to shore up Tier-I capital.
Banks that received infusion like PNB, BoI, BoB, IDBI Bank, OBC, Central
Bank and Bank of Maharashtra are in a comfortable position to fund their
near term growth.
SBI is expected to announce a rights issue in FY12E even though current
CAR is at comfortable levels. Its Tier I capital is at 9.6% while internal
accruals are also strong.
Private sector banks are adequately capitalised and have enough room to
even raise Tier II capital. Dhanlaxmi Bank, owing to its high growth
trajectory and small base would require capital immediately, which the
bank has announced already. The buffer (room for raising Tier II capital) is
small for Yes Bank but will fund FY12E balance sheet growth. Big private
banks like HDFC Bank, Axis Bank and Kotak Mahindra Bank are
comfortable with CAR in the visible future
S t r e n g t h c h e c k t o p a s s h i g h e r c o s t o f f u n d s
Considering that growth will be stable, rising cost of funds will pressurise
the NIM of banks in the coming quarters. We have analysed the loan
portfolio of the banks in light of proportion of term loans as a share of
total portfolio size. We believe that banks with lower term loans are better
placed to pass on the rising cost and protect NIM. Banks like HDFC Bank
and Axis Bank do not fall under this umbrella but they enjoy higher
proportion of CASA deposits (higher current balance compared to
industry, which bears no interest cost). This helps them protect NIM.
C r e d i t g r o w t h a n d c r e d i t r i s k g o h a n d i n h a n d
We understand that asset quality deterioration could dampen our positive
outlook for the banking space. The recent noise over higher slippages is
overdone considering that the industry has actually witnessed QoQ
decline in additional slippages after seven or eight quarters of NPL
additions in Q3FY11.
We have factored in higher slippages in FY11E on the back of
restructuring done in FY10 and lag effect of the economic slowdown in
FY09. We see NPL additions slowing down considerably in FY12E while
lower provisioning requirements would lead to higher profitability for the
industry. However, monsoon remains a major factor, which poses a risk
to our call of stable asset quality.
Restructured assets- Poison out of system
The major restructuring that took place in FY09-10 mostly expired
(moratorium period), which was proposed on such loans. On an average,
industry witnessed slippage of 12-15%. We expected it to peak out at 18-
20%. We, therefore, believe that pain from such accounts has mostly
been factored into the system and major additions would occur on a
case-to-case basis.
We believe stable growth and rising income levels will moderate
additions to NPLs, on the one hand, and the time is ripe for recoveries to
step up. Banks, which have already witnessed major slippages like
Federal Bank, Bank of India, Union Bank of India and IOB, can see a stepup in recoveries.
Provisioning requirement to moderate
Our synopsis is based on two factors; a) majority of banks have reached
their mandated provision coverage ratio of 70% excluding SBI that will
reach the mandated levels by September 2011, IOB by March 2011 and
Dhanlaxmi Bank that has applied for extension to the RBI. Also, major
grey areas like restructured assets, agriculture debt waiver and MFI
exposure are fully accounted for. Economic growth would support timely
repayment. Therefore, banks with higher slippages would aggressively
look for recoveries.
MFI exposure - not over 1% of total outstanding bank credit
Recently, the MFI exposure of the banking system came under the
scanner and this was especially pertinent to exposure in Andhra Pradesh
(AP). For such exposure, banks consider the borrower as primary
security. However, asset backed stays as additional collateral. After the
AP episode (controversy over lending practices, new rules to curb
functioning), repayments from MFI borrowers has taken a hit since
October 2010. This turned many standard loans of a few banks into NPA.
Under such cases, banks have demanded a replacement for collateral on
such loans. We believe this will soothe the jitters over MFI exposure.
From the I-direct coverage universe, we like Bank of Baroda, HDFC Bank,
PNB and SIB. We expect the recovery cycle to pick up with stable
economic growth. This could lead to a positive surprise from Federal
Bank, IOB and IDBI Bank.
R e g u l a t o r y p e r s p e c t i v e
Panel recommendation for effective transmission of monetary policy
• It has been suggested that the central bank make the repo rate
the key one for conducting monetary policy
Currently, there are two policy rates, the repo rate (@6.5% the
rate at which the RBI injects liquidity into the system) and the
reverse repo rate (@5.5%- is the rate at which RBI pulls out
liquidity from the system). The difference between these two rates
is sought to be the liquidity adjustment facility, or LAF corridor
• It has been suggested that the bank rate be reintroduced as a
discount rate through which the RBI can inject liquidity in
exceptional circumstances against collateral
The bank rate was in use when the RBI used to control various
mandated rates such as export credit. The bank rate was last
changed in 2003 and has remained unchanged thereafter at 6%
• Banks can borrow up to 1% more than their deposit base from the
RBI at the bank rate, the panel recommended. The committee also
suggests that the LAF corridor should be fixed at 150 basis points,
including the ESF. Within this, the bank rate should always be 50
basis points more than the repo and the reverse repo should be
100 basis points less than the repo rate.
• Persistent liquidity in excess of (+)/(-) 1% of NDTL should be
managed through other instruments such as outright open market
operations (OMO), cash reserve ratio (CRR) and market
stabilisation scheme (MSS)
• The collateral pool for reverse repo operations under LAF could
be extended to include oil bonds
• The minimum level of reserve to be maintained on one day by
banks with the RBI during a fortnight should be raised from the
present 70% to 80% of required CRR
New bank license
The Ministry of Finance has received RBI’s draft guidelines on new
banking license. The RBI is expected to issue guideline for new banking
license by March end as also suggested by the Finance Minister in his
Budget speech in February. The government is likely to set up a panel to
vet the draft entry rules framed by the RBI before they become fully
operational. We expect guidelines to be finalised in coming two or three
months and new licenses to be issued before the end of FY12E.
Savings rate deregulation
While the RBI is mulling on allowing banks to freely fix interest rates on
savings accounts, we believe the impact of such a move will be more on
PSB with a higher savings balance
Previous report – An extract
Banking stocks corrected across the board on the PSU banks ‘bribery for
loans’ scam, 2G and MFI loans, liquidity concerns and rising G-Sec yields.
However, one has to take a call on whether the sector will keep correcting
further. We believe the sector will continue to remain under pressure in
the near term where stocks may not give a sharp bounce-back. However,
they will remain around these levels until we are able to see a sharp up
tick in credit and deposits growth alongside pressure on yields easing off.
Most banks reached peak NIM in Q2FY11 mainly due to the full impact of
earlier deposit repricing and implementation of the base rate taking effect
along with no incremental deposits rise. The phenomenon cannot
continue in the same way. Also, the increase in deposit rates and slower
credit is leaving banks slightly under stress from increasing lending rates
across board. Therefore, we believe NIM is estimated to dip by 10-15 bps
for most banks in the coming quarter. Even here, banks with higher
reliance on wholesale deposits will face the heat, e.g. Yes Bank,
Dhanlaxmi Bank, IDBI Bank and Oriental Bank.
Synopsis
The price movement for the banking space did flatten in the past two or
three months. Contrary to our expectation of moderating NIM for Q3FY11,
many banks reported an expansion in NIM, which came in as a positive
surprise. The slippage was a concern area for a few banks like Federal
Bank, IDBI Bank, PNB, SBI and OBC. However, we believe that it is a short
lived phenomenon and the recovery cycle will pick up.
Mostly, the price correction in the past six months has brought most of
the banks to historical multiples (that got expanded in Q2FY11). Hence,
this offers long-term portfolio building opportunities. We are positive on
HDFC Bank (consistent PAT delivery and clean asset quality), Federal
Bank (growth in sight, recoveries to step up), Dena Bank (reasonable
valuation and growth prospects), Bank of Baroda (conservative and good
asset growth) and DCB (a niche play).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks: F u r t h e r s e l l - o f f s , a n o p p o r t u n i t y t o a c c umu l a t e…
We are upbeat on the growth story of Indian financials over the longer
term. Keeping aside shorter term jitters over asset quality, rising rates and
tight liquidity, which is factored in correction of stock prices, the longer
term picture provides comfort and opportunities to build the portfolio.
We believe that we have now entered the final round of rate hikes but the
road could be a little long. External shocks of rising crude and commodity
prices pose a threat to longer sustainability of elevated rates. The
expectation of a contraction in NIM due to tight liquidity and falling CASA
share is factored in the price.
The question here is: Is the price correction more than warranted?
Yes, we probably stand with this argument that negative headwinds
would subside and investment opportunities such as these should be
grabbed with both hands.
With less than a month to go in FY11E, we see credit growth closing
above 20% against mild moderation expected by us earlier. For FY12E,
we expect the industry to post over 20% credit growth and reasonable
pricing power to stay with industry (blessed by full implementation of
base rate). Deposit mobilisation should pick up with rates currently
reaching double digits and equities on a beating. NIM is not expected to
show a major reversal from current levels although it is expected to
moderate by 15-20 bps in the coming quarter. We are upbeat on
profitability for the BFSI space. After the recent price correction,
valuations are again in the average zone.
In our study, we are trying to address two key questions;
• Is the asset quality cry overdone?
• Are banks adequately capitalised for near term growth?
From the I-Direct coverage universe, we like banks with a strong retail
franchise (helps in maintaining NIM) like HDFC Bank, Axis Bank, stable
asset quality (in case of slowing macro environment) like Bank of Baroda
and a strong growth story like Yes Bank. We would also bet on a
turnaround story like Development Credit Bank. We strongly believe that
such a steep correction in prices should be taken as an opportunity to add
quality stocks. We understand the near term headwind would be
overlooked by strong economic growth supporting business growth.
S e c t o r v i e w
There is visibility on topline (NII) growth for the banking space on the
back of healthy credit growth and deposit growth with a lag effect. The
credit cost is expected to moderate since many banks have reached their
mandated PCR and slippages are expected to moderate. This would lead
to healthy bottomline (PAT) growth of 18-20% in FY12E.
Mostly, the price correction in the past six months has brought most of
the banks back to historical multiples (which got expanded in Q2FY11).
Hence, this offers long-term portfolio building opportunities. We are
positive on HDFC Bank (consistent PAT delivery and clean asset quality),
Federal Bank (growth in sight, recoveries to step up), Dena Bank
(reasonable valuation and growth prospects), Bank of Baroda
(conservative and good asset growth) and DCB (a turnaround story).
C r e d i t g r o w t h n e e d s c a p i t a l … …
With GDP expected to grow at 8.5% for FY12E, we expect the industry to
clock credit growth of 20-22%. The concern over non-secular credit
growth seems to have taken a back seat and we are witnessing
widespread growth in the economy. We generally see a direct correlation
between GDP growth and credit offtake (~2.7-3.1x GDP growth), which
can be seen in Exhibit 1.
We understand that currently controlling inflation and inflationary
expectation is the central agenda for the RBI. Raising rates further could
hinder economic growth. Thus, a fine balance between both is desired by
the industry. GDP growth of 8.2% in Q3FY11 was an outcome of slowing
industrial growth, which was a lag effect of seven rate hikes already
announced so far. We believe such soft industrial activity will continue for
a few more months on account of rising investment cost. Our mediumterm horizon provides us more visibility and comfort on the consistent
growth story for the Indian financial space.
Our study shows that banks like IOB, Syndicate and UBI among PSBs
would be required to shore up their Tier I capital to support their balance
sheet growth for FY12E.
Banks like IOB and Syndicate Bank have the room to raise funds without
government support (because of higher government stake). However, UBI
would require government support to shore up Tier-I capital.
Banks that received infusion like PNB, BoI, BoB, IDBI Bank, OBC, Central
Bank and Bank of Maharashtra are in a comfortable position to fund their
near term growth.
SBI is expected to announce a rights issue in FY12E even though current
CAR is at comfortable levels. Its Tier I capital is at 9.6% while internal
accruals are also strong.
Private sector banks are adequately capitalised and have enough room to
even raise Tier II capital. Dhanlaxmi Bank, owing to its high growth
trajectory and small base would require capital immediately, which the
bank has announced already. The buffer (room for raising Tier II capital) is
small for Yes Bank but will fund FY12E balance sheet growth. Big private
banks like HDFC Bank, Axis Bank and Kotak Mahindra Bank are
comfortable with CAR in the visible future
S t r e n g t h c h e c k t o p a s s h i g h e r c o s t o f f u n d s
Considering that growth will be stable, rising cost of funds will pressurise
the NIM of banks in the coming quarters. We have analysed the loan
portfolio of the banks in light of proportion of term loans as a share of
total portfolio size. We believe that banks with lower term loans are better
placed to pass on the rising cost and protect NIM. Banks like HDFC Bank
and Axis Bank do not fall under this umbrella but they enjoy higher
proportion of CASA deposits (higher current balance compared to
industry, which bears no interest cost). This helps them protect NIM.
C r e d i t g r o w t h a n d c r e d i t r i s k g o h a n d i n h a n d
We understand that asset quality deterioration could dampen our positive
outlook for the banking space. The recent noise over higher slippages is
overdone considering that the industry has actually witnessed QoQ
decline in additional slippages after seven or eight quarters of NPL
additions in Q3FY11.
We have factored in higher slippages in FY11E on the back of
restructuring done in FY10 and lag effect of the economic slowdown in
FY09. We see NPL additions slowing down considerably in FY12E while
lower provisioning requirements would lead to higher profitability for the
industry. However, monsoon remains a major factor, which poses a risk
to our call of stable asset quality.
Restructured assets- Poison out of system
The major restructuring that took place in FY09-10 mostly expired
(moratorium period), which was proposed on such loans. On an average,
industry witnessed slippage of 12-15%. We expected it to peak out at 18-
20%. We, therefore, believe that pain from such accounts has mostly
been factored into the system and major additions would occur on a
case-to-case basis.
We believe stable growth and rising income levels will moderate
additions to NPLs, on the one hand, and the time is ripe for recoveries to
step up. Banks, which have already witnessed major slippages like
Federal Bank, Bank of India, Union Bank of India and IOB, can see a stepup in recoveries.
Provisioning requirement to moderate
Our synopsis is based on two factors; a) majority of banks have reached
their mandated provision coverage ratio of 70% excluding SBI that will
reach the mandated levels by September 2011, IOB by March 2011 and
Dhanlaxmi Bank that has applied for extension to the RBI. Also, major
grey areas like restructured assets, agriculture debt waiver and MFI
exposure are fully accounted for. Economic growth would support timely
repayment. Therefore, banks with higher slippages would aggressively
look for recoveries.
MFI exposure - not over 1% of total outstanding bank credit
Recently, the MFI exposure of the banking system came under the
scanner and this was especially pertinent to exposure in Andhra Pradesh
(AP). For such exposure, banks consider the borrower as primary
security. However, asset backed stays as additional collateral. After the
AP episode (controversy over lending practices, new rules to curb
functioning), repayments from MFI borrowers has taken a hit since
October 2010. This turned many standard loans of a few banks into NPA.
Under such cases, banks have demanded a replacement for collateral on
such loans. We believe this will soothe the jitters over MFI exposure.
From the I-direct coverage universe, we like Bank of Baroda, HDFC Bank,
PNB and SIB. We expect the recovery cycle to pick up with stable
economic growth. This could lead to a positive surprise from Federal
Bank, IOB and IDBI Bank.
R e g u l a t o r y p e r s p e c t i v e
Panel recommendation for effective transmission of monetary policy
• It has been suggested that the central bank make the repo rate
the key one for conducting monetary policy
Currently, there are two policy rates, the repo rate (@6.5% the
rate at which the RBI injects liquidity into the system) and the
reverse repo rate (@5.5%- is the rate at which RBI pulls out
liquidity from the system). The difference between these two rates
is sought to be the liquidity adjustment facility, or LAF corridor
• It has been suggested that the bank rate be reintroduced as a
discount rate through which the RBI can inject liquidity in
exceptional circumstances against collateral
The bank rate was in use when the RBI used to control various
mandated rates such as export credit. The bank rate was last
changed in 2003 and has remained unchanged thereafter at 6%
• Banks can borrow up to 1% more than their deposit base from the
RBI at the bank rate, the panel recommended. The committee also
suggests that the LAF corridor should be fixed at 150 basis points,
including the ESF. Within this, the bank rate should always be 50
basis points more than the repo and the reverse repo should be
100 basis points less than the repo rate.
• Persistent liquidity in excess of (+)/(-) 1% of NDTL should be
managed through other instruments such as outright open market
operations (OMO), cash reserve ratio (CRR) and market
stabilisation scheme (MSS)
• The collateral pool for reverse repo operations under LAF could
be extended to include oil bonds
• The minimum level of reserve to be maintained on one day by
banks with the RBI during a fortnight should be raised from the
present 70% to 80% of required CRR
New bank license
The Ministry of Finance has received RBI’s draft guidelines on new
banking license. The RBI is expected to issue guideline for new banking
license by March end as also suggested by the Finance Minister in his
Budget speech in February. The government is likely to set up a panel to
vet the draft entry rules framed by the RBI before they become fully
operational. We expect guidelines to be finalised in coming two or three
months and new licenses to be issued before the end of FY12E.
Savings rate deregulation
While the RBI is mulling on allowing banks to freely fix interest rates on
savings accounts, we believe the impact of such a move will be more on
PSB with a higher savings balance
Previous report – An extract
Banking stocks corrected across the board on the PSU banks ‘bribery for
loans’ scam, 2G and MFI loans, liquidity concerns and rising G-Sec yields.
However, one has to take a call on whether the sector will keep correcting
further. We believe the sector will continue to remain under pressure in
the near term where stocks may not give a sharp bounce-back. However,
they will remain around these levels until we are able to see a sharp up
tick in credit and deposits growth alongside pressure on yields easing off.
Most banks reached peak NIM in Q2FY11 mainly due to the full impact of
earlier deposit repricing and implementation of the base rate taking effect
along with no incremental deposits rise. The phenomenon cannot
continue in the same way. Also, the increase in deposit rates and slower
credit is leaving banks slightly under stress from increasing lending rates
across board. Therefore, we believe NIM is estimated to dip by 10-15 bps
for most banks in the coming quarter. Even here, banks with higher
reliance on wholesale deposits will face the heat, e.g. Yes Bank,
Dhanlaxmi Bank, IDBI Bank and Oriental Bank.
Synopsis
The price movement for the banking space did flatten in the past two or
three months. Contrary to our expectation of moderating NIM for Q3FY11,
many banks reported an expansion in NIM, which came in as a positive
surprise. The slippage was a concern area for a few banks like Federal
Bank, IDBI Bank, PNB, SBI and OBC. However, we believe that it is a short
lived phenomenon and the recovery cycle will pick up.
Mostly, the price correction in the past six months has brought most of
the banks to historical multiples (that got expanded in Q2FY11). Hence,
this offers long-term portfolio building opportunities. We are positive on
HDFC Bank (consistent PAT delivery and clean asset quality), Federal
Bank (growth in sight, recoveries to step up), Dena Bank (reasonable
valuation and growth prospects), Bank of Baroda (conservative and good
asset growth) and DCB (a niche play).
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