Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
For most of January 2011, banking stocks were lacklustre on
fears of further rate hikes owing to rising food inflation, leading
to underperformance of the BSE Bankex against the Sensex. In
February, with government spending kicking in and deposit
accretion by banks gaining momentum, liquidity started easing
as evident from overnight borrowings from the RBI for the first
fortnight of February averaging ~`74,000cr compared to over
`1,05,000cr during the second fortnight of January. PSU banks
also showed good momentum on the back of finalisation of
capital infusion into a few PSU banks. The Union Budget also
turned out to be encouraging for the banking sector as the
finance minister continued with reforms to increase the
availability of funds to the private sector. By the end of the quarter,
the Bankex was down 0.6% sequentially, however,
it outperformed the Sensex by 4.6%. Within our coverage
universe, J&K Bank gave the highest returns of 12.7%
sequentially, followed by BOI and Federal Bank, with gains of
6.3% and 5.4%, respectively.
Interest rates at peak; demand growth gaining
momentum
In the last couple of months, the broader interest rates have
already increased by a substantial 200-250bp, which may cool
down credit growth from the current 23.2% (as of March 11,
2011) to more sustainable 18-20% levels, even as deposit
mobilisation (currently 16.6%) continues to increase in the
coming months due to the recent increase in interest rates.
From December 31, 2010, to March 11, 2011, banks have
incrementally lent `92,854cr, a decline of 11.8% compared to
the credit offtake over the same period last year. The deposit
mobilisation over the period of consideration is `1,68,979cr, a
rise of 20.3% compared to the deposit mobilisation over the
same period last year.
The incremental credit-to-deposit ratio from December 31,
2010, to March 11, 2011, fell to 55.0% from 142.0% in
3QFY2011. Consequently, the overall credit-to-deposit ratio
fell to 75.0% from 75.7% at the start of 4QFY2011.
As a result, as far as broader interest rates are concerned,
we believe rates have peaked and banks are unlikely to change
deposit rates until April at least, with further hikes beyond April
also appearing to be unlikely.
Liquidity concerns receding
The liquidity tightness, which prevailed in December 2010 eased
slightly in January 2011, with average LAF borrowings at
~`91,300cr compared to `1,19,400cr in December 2010. Post
the rate hikes on January 25, 2011, liquidity concerns further
eased with average LAF borrowings falling to `74,700cr upto
March 14, 2011. Although advance tax outflows for the fourth
quarter resulted in LAF borrowings touching `1,45,400cr (as of
March 17, the highest in 4QFY2011), temporary pressures soon
alleviated as average LAF borrowings dropped to `72,200cr for
the last week of the quarter.
The persistent tight liquidity situation and slower deposits growth
that prevailed in the last quarter prompted many banks to raise
their fixed deposit interest rates aggressively across maturities.
An average rate hike of 50-150bp in the last quarter was
supplemented by a ~100bp hike in the current quarter,
eventually leading to relative easing of liquidity pressures.
To maintain their margins, banks also raised lending rates
by 50-100bp during the quarter. Corporation Bank had the
highest average base rate change (108bp) amongst banks
under our coverage.
Large banks better placed to sustain NIMs
On account of the recent rise in deposit rates, especially
wholesale deposit rates, we expect NIMs to decline by
5-15bp in 4QFY2011, more so in case of smaller banks.
That said, a large part of NIM compression expected in FY2012
would be back-ended as the deposit cost increase lags the
increase in yield on advances. Going forward, over the next
4-6 quarters, we expect rising retail and wholesale fixed deposit
rates to lead to a substantial 40-60bp NIM compression for
low-CASA, mid-size banks. Correspondingly, larger banks with
high CASA ratio and robust branch expansion such as SBI,
ICICI Bank, HDFC Bank and Axis Bank are better placed to
sustain their NIMs going forward.
Provisioning for employee benefits
The RBI has allowed PSU banks to amortise the liabilities arising
out of second pension option for existing employees over a
period of five years. However, there is lack of clarity regarding
the treatment of pension liabilities for retired employees.
Although the RBI notification suggests that banks ought to make
a one-off provision for liabilities related to retired employees in
4QFY2011, our interaction with managements of few banks
indicates that there is a strong possibility of banks being allowed
to amortise pension costs related to retired employees too.
According to news articles, while Canara Bank might have to
provide a one-time provision of `100cr-150cr in 4QFY2011
for its retired employees, Union Bank could have to provide
anything between `350cr-600cr in the quarter towards pension
for its retired employees. To account for the likelihood of banks
reporting these expenses in the current quarter, we have
conservatively factored in estimated provisioning burdens on
an approximate basis, assuming banks are allowed at least
four quarters to amortise this liability. However, any unexpected
high pension expenditure related to retired employees reported
by banks could act as a downside risk to our earnings estimates.
Asset quality improves further
The asset quality of the entire sector especially private banks
continued to improve in 3QFY2011, which is evident from the
fact that the net NPA ratio for the entire sector has been on a
declining trend since 3QFY2010 (coming off from a peak of
1.15% in 3QFY2010 to 0.99% in 3QFY2011). Net NPA ratio
of private banks halved from 1.27% in 3QFY2010 to 0.67% in
3QFY2011. Only 12 out of the 39 listed banks registered an
increase in net NPA ratio in 3QFY2011 v/s 23 banks witnessing
an increase in 3QFY2010.
The government has extended the mandated timeline for
implementing the CBS-based NPA recognition system from
4QFY2011 to 1QFY2012 for accounts up to `50lakh. The
relaxation of one quarter is likely to lessen the spurt in slippages
that would have been witnessed in 4QFY2011 for PSU banks
that have not yet already switched over to CBS-based systems
and will give them additional time to cleanse the data and avoid
any inconsistencies while shifting to the new platform.
Considering that interest rates have gone up by ~200bp,
we would be also watchful of incremental asset-quality pressures.
Accordingly, in the mid-cap space, we prefer banks that have
either been conservative in the last couple of years (for instance,
Syndicate Bank) or have already seen bulk of asset-quality
pressures and will see an improvement going forward (such as
Indian Overseas Bank). In case of larger banks, we broadly
expect asset quality to continue to show an improving trend.
G-sec yields remain firm through 4QFY2011
The benchmark 10-year G-sec bond yield has more or less
remained firm at ~8% through 4QFY2011, although there was
some temporary easing post the Union Budget when the finance
minister by refraining from having any major populist measure
brought down the targeted fiscal deficit estimate to 4.6%. After
softening by ~8bp to 7.93%, the lowest in the entire quarter,
the 10-year G-sec bond yield climbed back to the pre-Budget
levels of ~8%. With interest rates being stable across the entire
yield curve, no significant MTM losses are expected to be
reported by banks under our coverage for 4QFY2011.
Moreover, with increasing amount of insurance sector flows
being directed towards debt rather than equity, and overall
market borrowings by the government unlikely to be more than
14-15% higher than in FY2011, G-sec yields are unlikely to
have an upward bias in FY2012E.
Capital infusion plans underway; will help banks to
meet Basel III norms
The government’s capital infusion plans have already taken
off, with 15 PSU banks receiving their approved capital during
the quarter. This will ensure tier-I CRAR of all public sector banks
in excess of 8% and raise the government’s holding in all public
sector banks to ~58%. Bank of Baroda is the biggest beneficiary
with a capital infusion of `2,461cr (6.8% equity dilution), while
OBC is the biggest recipient under our coverage universe with
approved capital infusion of `1,740cr (also the highest equity
dilution at 16.5%).
Regulatory events during 4QFY2011
Introduction of new banking licenses to improve financial
inclusion was on the horizon since last year. Having already
published a discussion paper regarding the same, the RBI is
expected to come out with guidelines for eligibility of awarding
these licenses in the next few weeks. In addition, the RBI is
expected to outline the process of entry of foreign banks in
India. The RBI in the near future is also expected to release a
discussion paper regarding the deregulation of savings rate.
The banking amendment bill, which aligns the ability of
shareholders to exert voting rights in line with their ownership
as compared to previous limitations of 1% in state-owned banks
and 10% in private banks, has been cleared by the parliament.
The parliament in the current quarter also cleared the
State Bank of India (SBI) Amendment Bill, bringing the affairs
of five SBI subsidiaries directly under the government's
supervision. The bill, which provides means for SBI to enhance
its capital base, is also expected to make the process of merger
of the subsidiary banks with SBI smoother.
The Union Budget was also encouraging for the banking
sector as the finance minister continued with the reforms to
increase availability of funds to the private sector. The finance
minister also refrained from announcing any major populist
measures, bringing the budgeted level of fiscal deficit for FY2012
down to 4.6%.
Outlook
The RBI revised the key policy rates eight times during FY2011
to battle inflation. Going forward, we expect inflation to cool
down to 5-7%, though any negative surprises on this front would
be a downside risk for the sector. While the broader interest
rates have also increased by ~200bp, credit demand during
this period sustained at above 20% levels, indicating strength
of the underlying demand. We expect credit growth to remain
at 19-20% over FY2012-13, consistent with an expected GDP
growth rate of 8%.
Deposit mobilisation, which lacked momentum till 3QFY2011,
picked up during 4QFY2011 on the back of a further hike of
~100bp in fixed deposit rates. Further, with receding liquidity
concerns, we believe interest rates have peaked.
The peaking of interest rates coupled with stabilising asset quality
augurs well for the entire banking sector. That said, in light of
the ~200bp increase in interest rates, we believe incremental
margin and asset-quality pressures could lead to a deteriorating
earnings trend for banks that have aggressively relied on
wholesale deposits to fund high credit growth. Accordingly,
we continue to like large banks with strong deposit franchises,
and ICICI Bank and Axis Bank are our top picks in this space.
In the mid-cap space, we prefer banks that have either already
seen bulk of the asset-quality pressures or have been relatively
conservative in the past couple of years. In this space, we like
Corporation Bank, Indian Bank, Indian Overseas Bank
and Syndicate Bank.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
For most of January 2011, banking stocks were lacklustre on
fears of further rate hikes owing to rising food inflation, leading
to underperformance of the BSE Bankex against the Sensex. In
February, with government spending kicking in and deposit
accretion by banks gaining momentum, liquidity started easing
as evident from overnight borrowings from the RBI for the first
fortnight of February averaging ~`74,000cr compared to over
`1,05,000cr during the second fortnight of January. PSU banks
also showed good momentum on the back of finalisation of
capital infusion into a few PSU banks. The Union Budget also
turned out to be encouraging for the banking sector as the
finance minister continued with reforms to increase the
availability of funds to the private sector. By the end of the quarter,
the Bankex was down 0.6% sequentially, however,
it outperformed the Sensex by 4.6%. Within our coverage
universe, J&K Bank gave the highest returns of 12.7%
sequentially, followed by BOI and Federal Bank, with gains of
6.3% and 5.4%, respectively.
Interest rates at peak; demand growth gaining
momentum
In the last couple of months, the broader interest rates have
already increased by a substantial 200-250bp, which may cool
down credit growth from the current 23.2% (as of March 11,
2011) to more sustainable 18-20% levels, even as deposit
mobilisation (currently 16.6%) continues to increase in the
coming months due to the recent increase in interest rates.
From December 31, 2010, to March 11, 2011, banks have
incrementally lent `92,854cr, a decline of 11.8% compared to
the credit offtake over the same period last year. The deposit
mobilisation over the period of consideration is `1,68,979cr, a
rise of 20.3% compared to the deposit mobilisation over the
same period last year.
The incremental credit-to-deposit ratio from December 31,
2010, to March 11, 2011, fell to 55.0% from 142.0% in
3QFY2011. Consequently, the overall credit-to-deposit ratio
fell to 75.0% from 75.7% at the start of 4QFY2011.
As a result, as far as broader interest rates are concerned,
we believe rates have peaked and banks are unlikely to change
deposit rates until April at least, with further hikes beyond April
also appearing to be unlikely.
Liquidity concerns receding
The liquidity tightness, which prevailed in December 2010 eased
slightly in January 2011, with average LAF borrowings at
~`91,300cr compared to `1,19,400cr in December 2010. Post
the rate hikes on January 25, 2011, liquidity concerns further
eased with average LAF borrowings falling to `74,700cr upto
March 14, 2011. Although advance tax outflows for the fourth
quarter resulted in LAF borrowings touching `1,45,400cr (as of
March 17, the highest in 4QFY2011), temporary pressures soon
alleviated as average LAF borrowings dropped to `72,200cr for
the last week of the quarter.
The persistent tight liquidity situation and slower deposits growth
that prevailed in the last quarter prompted many banks to raise
their fixed deposit interest rates aggressively across maturities.
An average rate hike of 50-150bp in the last quarter was
supplemented by a ~100bp hike in the current quarter,
eventually leading to relative easing of liquidity pressures.
To maintain their margins, banks also raised lending rates
by 50-100bp during the quarter. Corporation Bank had the
highest average base rate change (108bp) amongst banks
under our coverage.
Large banks better placed to sustain NIMs
On account of the recent rise in deposit rates, especially
wholesale deposit rates, we expect NIMs to decline by
5-15bp in 4QFY2011, more so in case of smaller banks.
That said, a large part of NIM compression expected in FY2012
would be back-ended as the deposit cost increase lags the
increase in yield on advances. Going forward, over the next
4-6 quarters, we expect rising retail and wholesale fixed deposit
rates to lead to a substantial 40-60bp NIM compression for
low-CASA, mid-size banks. Correspondingly, larger banks with
high CASA ratio and robust branch expansion such as SBI,
ICICI Bank, HDFC Bank and Axis Bank are better placed to
sustain their NIMs going forward.
Provisioning for employee benefits
The RBI has allowed PSU banks to amortise the liabilities arising
out of second pension option for existing employees over a
period of five years. However, there is lack of clarity regarding
the treatment of pension liabilities for retired employees.
Although the RBI notification suggests that banks ought to make
a one-off provision for liabilities related to retired employees in
4QFY2011, our interaction with managements of few banks
indicates that there is a strong possibility of banks being allowed
to amortise pension costs related to retired employees too.
According to news articles, while Canara Bank might have to
provide a one-time provision of `100cr-150cr in 4QFY2011
for its retired employees, Union Bank could have to provide
anything between `350cr-600cr in the quarter towards pension
for its retired employees. To account for the likelihood of banks
reporting these expenses in the current quarter, we have
conservatively factored in estimated provisioning burdens on
an approximate basis, assuming banks are allowed at least
four quarters to amortise this liability. However, any unexpected
high pension expenditure related to retired employees reported
by banks could act as a downside risk to our earnings estimates.
Asset quality improves further
The asset quality of the entire sector especially private banks
continued to improve in 3QFY2011, which is evident from the
fact that the net NPA ratio for the entire sector has been on a
declining trend since 3QFY2010 (coming off from a peak of
1.15% in 3QFY2010 to 0.99% in 3QFY2011). Net NPA ratio
of private banks halved from 1.27% in 3QFY2010 to 0.67% in
3QFY2011. Only 12 out of the 39 listed banks registered an
increase in net NPA ratio in 3QFY2011 v/s 23 banks witnessing
an increase in 3QFY2010.
The government has extended the mandated timeline for
implementing the CBS-based NPA recognition system from
4QFY2011 to 1QFY2012 for accounts up to `50lakh. The
relaxation of one quarter is likely to lessen the spurt in slippages
that would have been witnessed in 4QFY2011 for PSU banks
that have not yet already switched over to CBS-based systems
and will give them additional time to cleanse the data and avoid
any inconsistencies while shifting to the new platform.
Considering that interest rates have gone up by ~200bp,
we would be also watchful of incremental asset-quality pressures.
Accordingly, in the mid-cap space, we prefer banks that have
either been conservative in the last couple of years (for instance,
Syndicate Bank) or have already seen bulk of asset-quality
pressures and will see an improvement going forward (such as
Indian Overseas Bank). In case of larger banks, we broadly
expect asset quality to continue to show an improving trend.
G-sec yields remain firm through 4QFY2011
The benchmark 10-year G-sec bond yield has more or less
remained firm at ~8% through 4QFY2011, although there was
some temporary easing post the Union Budget when the finance
minister by refraining from having any major populist measure
brought down the targeted fiscal deficit estimate to 4.6%. After
softening by ~8bp to 7.93%, the lowest in the entire quarter,
the 10-year G-sec bond yield climbed back to the pre-Budget
levels of ~8%. With interest rates being stable across the entire
yield curve, no significant MTM losses are expected to be
reported by banks under our coverage for 4QFY2011.
Moreover, with increasing amount of insurance sector flows
being directed towards debt rather than equity, and overall
market borrowings by the government unlikely to be more than
14-15% higher than in FY2011, G-sec yields are unlikely to
have an upward bias in FY2012E.
Capital infusion plans underway; will help banks to
meet Basel III norms
The government’s capital infusion plans have already taken
off, with 15 PSU banks receiving their approved capital during
the quarter. This will ensure tier-I CRAR of all public sector banks
in excess of 8% and raise the government’s holding in all public
sector banks to ~58%. Bank of Baroda is the biggest beneficiary
with a capital infusion of `2,461cr (6.8% equity dilution), while
OBC is the biggest recipient under our coverage universe with
approved capital infusion of `1,740cr (also the highest equity
dilution at 16.5%).
Regulatory events during 4QFY2011
Introduction of new banking licenses to improve financial
inclusion was on the horizon since last year. Having already
published a discussion paper regarding the same, the RBI is
expected to come out with guidelines for eligibility of awarding
these licenses in the next few weeks. In addition, the RBI is
expected to outline the process of entry of foreign banks in
India. The RBI in the near future is also expected to release a
discussion paper regarding the deregulation of savings rate.
The banking amendment bill, which aligns the ability of
shareholders to exert voting rights in line with their ownership
as compared to previous limitations of 1% in state-owned banks
and 10% in private banks, has been cleared by the parliament.
The parliament in the current quarter also cleared the
State Bank of India (SBI) Amendment Bill, bringing the affairs
of five SBI subsidiaries directly under the government's
supervision. The bill, which provides means for SBI to enhance
its capital base, is also expected to make the process of merger
of the subsidiary banks with SBI smoother.
The Union Budget was also encouraging for the banking
sector as the finance minister continued with the reforms to
increase availability of funds to the private sector. The finance
minister also refrained from announcing any major populist
measures, bringing the budgeted level of fiscal deficit for FY2012
down to 4.6%.
Outlook
The RBI revised the key policy rates eight times during FY2011
to battle inflation. Going forward, we expect inflation to cool
down to 5-7%, though any negative surprises on this front would
be a downside risk for the sector. While the broader interest
rates have also increased by ~200bp, credit demand during
this period sustained at above 20% levels, indicating strength
of the underlying demand. We expect credit growth to remain
at 19-20% over FY2012-13, consistent with an expected GDP
growth rate of 8%.
Deposit mobilisation, which lacked momentum till 3QFY2011,
picked up during 4QFY2011 on the back of a further hike of
~100bp in fixed deposit rates. Further, with receding liquidity
concerns, we believe interest rates have peaked.
The peaking of interest rates coupled with stabilising asset quality
augurs well for the entire banking sector. That said, in light of
the ~200bp increase in interest rates, we believe incremental
margin and asset-quality pressures could lead to a deteriorating
earnings trend for banks that have aggressively relied on
wholesale deposits to fund high credit growth. Accordingly,
we continue to like large banks with strong deposit franchises,
and ICICI Bank and Axis Bank are our top picks in this space.
In the mid-cap space, we prefer banks that have either already
seen bulk of the asset-quality pressures or have been relatively
conservative in the past couple of years. In this space, we like
Corporation Bank, Indian Bank, Indian Overseas Bank
and Syndicate Bank.
No comments:
Post a Comment