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India Banks - Deposit growth tracking well: 16.5% y-y as per latest data
Liquidity returning: LAF deficit at 1.5% of deposits in Feb'11
Sensitivity of loan demand to government borrowing detailed
Frontline banks at mean valuations offer buying opportunities
Recent macro trends
Loan and deposit growth trends
Loan growth for the sector (as on 25 February, according to data from the
Reserve Bank of India) is 23.3% y-y and deposit growth is at 16.5% y-y.
Deposit growth traction is evident, given the hikes in deposit rates of
300bp across the board. Deposit growth was 15% y-y in October 2010
and has inched up further now. As highlighted in our note Seize the
moment (11 February 2011), we see signs of the liquidity situation
easing.
Liquidity deficit easing
The deficit in the Liquidity Adjustment Facility (LAF) window, which had
peaked at 3.5% of net deposits in December 2010, had declined to 1.4%
of net deposits in early February 2011. This deficit had further narrowed
to around 1% in the first week of March. However, advance tax payments
have widened the deficit by around INR500b over the last few days. We
expect this deficit to decline to 1% of deposits by April. Exhibit 1 details
the trend in the LAF window. Our discussions with several banks and the
RBI also point toward improvement in central government spending and
improvement in LAF deficit over the next few weeks.
Inflation and sensitivity to oil prices
We believe the uncertainty surrounding international crude oil prices will
weigh on the sector’s valuations, and Exhibit 2 captures the historical comovement
of crude oil price and one-year forward average P/BV multiple
for the sector. As can be seen from past cycles, a decline in crude oil
prices could be a significant positive for Indian bank valuations. However,
as Exhibit 3 shows, a decrease in crude prices has a delayed impact on
WPI inflation and we could see inflation persisting at a higher level for the
next few months.
Fiscal deficit, government borrowing and credit growth
The recently announced budget has pegged FY12 fiscal deficit at 4.6%
and net central government borrowing at INR3,580b (USD80b assuming
INR45/USD). The concern is that the government borrowing number may
have been understated and that it could crowd out private sector lending.
Our sensitivity analysis (Exhibit 4) indicates that even if central and
state government borrowing is around USD125b, the deposit accretion in
the system would be able to support a ‘base case’ sector loan growth of
16% in FY12.
What to do with the sector
We recognise that some headwinds are likely for the sector in terms of
uncertainty on international oil prices, domestic price stability and capital
flight to safety. Clearly, we are not calling the bottom here. However,
many front-line stocks are trading close to their historical mean valuations
and we believe these present good incremental buying opportunities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Banks - Deposit growth tracking well: 16.5% y-y as per latest data
Liquidity returning: LAF deficit at 1.5% of deposits in Feb'11
Sensitivity of loan demand to government borrowing detailed
Frontline banks at mean valuations offer buying opportunities
Recent macro trends
Loan and deposit growth trends
Loan growth for the sector (as on 25 February, according to data from the
Reserve Bank of India) is 23.3% y-y and deposit growth is at 16.5% y-y.
Deposit growth traction is evident, given the hikes in deposit rates of
300bp across the board. Deposit growth was 15% y-y in October 2010
and has inched up further now. As highlighted in our note Seize the
moment (11 February 2011), we see signs of the liquidity situation
easing.
Liquidity deficit easing
The deficit in the Liquidity Adjustment Facility (LAF) window, which had
peaked at 3.5% of net deposits in December 2010, had declined to 1.4%
of net deposits in early February 2011. This deficit had further narrowed
to around 1% in the first week of March. However, advance tax payments
have widened the deficit by around INR500b over the last few days. We
expect this deficit to decline to 1% of deposits by April. Exhibit 1 details
the trend in the LAF window. Our discussions with several banks and the
RBI also point toward improvement in central government spending and
improvement in LAF deficit over the next few weeks.
Inflation and sensitivity to oil prices
We believe the uncertainty surrounding international crude oil prices will
weigh on the sector’s valuations, and Exhibit 2 captures the historical comovement
of crude oil price and one-year forward average P/BV multiple
for the sector. As can be seen from past cycles, a decline in crude oil
prices could be a significant positive for Indian bank valuations. However,
as Exhibit 3 shows, a decrease in crude prices has a delayed impact on
WPI inflation and we could see inflation persisting at a higher level for the
next few months.
Fiscal deficit, government borrowing and credit growth
The recently announced budget has pegged FY12 fiscal deficit at 4.6%
and net central government borrowing at INR3,580b (USD80b assuming
INR45/USD). The concern is that the government borrowing number may
have been understated and that it could crowd out private sector lending.
Our sensitivity analysis (Exhibit 4) indicates that even if central and
state government borrowing is around USD125b, the deposit accretion in
the system would be able to support a ‘base case’ sector loan growth of
16% in FY12.
What to do with the sector
We recognise that some headwinds are likely for the sector in terms of
uncertainty on international oil prices, domestic price stability and capital
flight to safety. Clearly, we are not calling the bottom here. However,
many front-line stocks are trading close to their historical mean valuations
and we believe these present good incremental buying opportunities.
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