Banking - liquidity conditions set to ease; wholesale rates to follow; Edelweiss

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

n  Liquidity conditions likely to ease

We expect liquidity to ease from the previous fortnightly average of (-) INR 900 bn owing to leaner credit period, low government borrowings, and pick up in deposit growth. However, given the backdrop of inflationary conditions, we expect RBI to keep liquidity in deficit mode to ensure transmission mechanism remains effective, especially as long as inflation remains high (above 5.5-6.0%).

n  Rates to follow, starting with wholesale

Given the improving liquidity situation, we expect the inverted yield curve to stand corrected with higher decline in short-end rates. However, given the view of deficit liquidity, we do not expect a sharp decline in rates (3M CD rate not to go below 8%). Effective April 1, 2011, Central Bank of India, slashed its retail term deposit rates in the <1 year bucket and discontinued 555 deposit scheme where it was offering 9.6% rate. We expect other banks to follow; however, retail deposit rates (1-2 year bucket) are unlikely to correct much despite improving liquidity as banks are unlikely to forego the momentum build up on deposit accumulation. With correction in the short end of the curve, we expect banks to cut their base rates with a lag. However, for the year, we believe with inflation continuing to remain above RBI’s comfort zone and pick up in credit growth we anticipate rates to stay higher in the second half of the year.

n  Margins likely to decline 15-20bps in FY12E

We expect margins to decline 15-20bps for our coverage universe in FY12E as the full impact of hike in deposit rates plays out coupled with lower investment spreads, with wholesale-funded banks to be impacted more. However, as wholesale rates start declining faster, we expect margins of wholesale funded banks like Yes Bank and Oriental Bank of Commerce to  bottom out much earlier in Q1/Q2, whereas the lagged impact will lead to bottoming out of margins for others in Q2/Q3.

n  Risk–reward turning favourable for mid-cap banks

In our sector update, Macro challenges here to stay; risk-reward turning favorable, dated February 17, 2011, we turned cautiously optimistic on the sector with valuations getting into the comfort zone. Then, we had preferred quality names with strong liability franchise as we were wary of tight liquidity situation in March and rising interest rates. However, with comfortable liquidity condition, benign GSEC yields, and reasonable valuations, we believe the risk-reward is turning favorable for some mid-cap banks as well. Mid-cap PSU banks have corrected 35% from the peak (in November 2010) and factoring the easing liquidity have made a smart recovery in line with their larger counterparts (in past 7-8 weeks). In mid caps, we prefer Allahabad Bank and Federal Bank and amongst large caps our top picks continue to be Axis Bank and ICICI Bank.