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Key takeaways- management meeting and interviews
Round up on news flows- regulatory and company-specific
Banking sector round-up- Credit growth, interest rates and liquidity
Update on insurance and mutual funds– Flow, market share
Valuation– Price performance, comparative matrix, P/B band charts
Take a look!, ‘Banking Calendar’, links to our recent reports
Takeaways-management meeting and interviews
In our meetings, banks reiterated that credit growth over recent months has been
led by demand for working capital loan that has offset some moderation in growth
of loans to infrastructure sector- this also corroborates with our analysis of trends
in credit growth (click for note). While liquidity has eased driving fall in wholesale
borrowing costs, banks expect liquidity to remain in deficit, though at lower levels
compared to levels seen in 4QFY11. Banks do not foresee much change to retail
deposit rates as high inflation is likely to keep policy and market rates high. Rise
in term deposit rates, which is also driving shift of CASA to term deposits, will put
margins under pressure. Most banks are comfortable about future asset quality
trends, but our recent interaction with a credit rating agency indicates that ratio of
credit rating upgrades versus downgrades has peaked and there is a risk of
reversal in this trend- which could be potential risk to asset quality.
Sector round-up– Banks lead market rally
Over past month, Sensex has moved-up by 9% supported by outperformance by
banks and NBFCs that constitute 25% of index and rose by ~11%. Among the
financials, wholesale funded banks and NBFCs have outperformed. As the 4QFY11
reporting season kicks-off, we expect sector’s price performance to be driven by a
combination of quality of results in the financial sector as well as that of other
sectors. During 4Q, we expect banks to report 31% YoY growth in profit (among
highest vis-à-vis other sectors), boosted healthy growth in core income and a low
base. Key trends to watch would be (1) loan growth, (2) CASA growth, (3)
margins, (4) asset quality and (5) provisioning for pension liabilities.
Update on insurance and mutual funds- Feb-11/ Mar-11
During Feb-11, NBP of sector declined by 9% YoY, due to 33% YoY decline in NBP
of private sector whereas LIC reported 19% growth. Among private insurers only
MNYL reported growth while ICICI, HDFC and SBI reported a decline. In Mar-11,
AUMs of mutual funds fell by 16% MoM to Rs6tn (-4% YoY) due to redemption
from debt schemes (partly seasonal for March) and low inflows in equity schemes.
Charts of month: Loan growth in key segments: Rise in demand for working capital
Regulatory and sector newsflows
As per the budget for FY12, government is likely to raise Rs3.4tn through issue of GSecs;
the amount of net borrowings is flat YoY. Of the total borrowing, the government
plans to complete nearly 60% during 1HFY12.
RBI has extended the additional liquidity support under the Liquidity Adjustment
Facility (LAF) up to 6th May 2011.
The government has infused Rs124bn as equity capital in 15 PSU banks to shore-up
their capital adequacy and government’s shareholding in these banks.
The government has relaxed the norms for appointment as Chairman and Managing
director (CMD) at public sector undertaking (PSU) banks. To be eligible for appointment
as CMD, a person will now require at least 18 months of residual service and six
months experience as an Executive Director (ED). Earlier, the person was required to
have at least two years of residual service and one-year stint as an ED.
RBI has permitted NBFCs to include loans to ‘telecom tower’ companies in their
infrastructure loan portfolio. This will help infrastructure finance companies (IFC) to
enhance their reported share of infrastructure loans.
The government has raised cap on FII investment in corporate bonds issued by
infrastructure companies from US$5bn to US$25bn. Consequently, total cap on FII
investment in corporate bonds has been raised from US$20bn to US$40bn.
As a part of restructuring of Kingfisher Airlines’ debt, 13 banks have been allocated
equity shares in the company and now collectively hold 23% stake in the company. The
shares have been priced at Rs64.5 (inline with SEBI norms), but are at premium to the
market price of Rs41 on 31st March (issue date). As a result, banks should see markto-
market (MTM) losses on these shares.
Company newsflows
Mr. Pratip Chaudhuri has been appointed the Chairman of State Bank of India. The
three new Managing Directors would be Mr. Diwakar Gupta, Mr. Hemant Contractor and
Mr. A Krishna Kumar. Mr. R Sridharan has been the longest serving MD at the bank.
Central Bank of India has raised Rs25bn through a rights issue of equity shares at a
price of Rs103/ share.
IDFC has raised Rs2.3bn in the third tranche of retail infrastructure bonds. In the two
previous tranches, the company had raised Rs13bn.
As per media reports RBI has requested the government to consider the application of
Turkish bank Bank Asya to launch Islamic banking in India.
RBI has asked Axis Bank to justify the valuation of Rs20bn for acquisition of Enam.
Bank of Baroda plans to expand operations in New Zealand through a branch in
Auckland; it currently has 70 offices in 24 countries.
Interesting interviews
Mr. Pratip Chaudhuri (SBI’s new Chairman) (click here for news article): Key comments
1. Growth outlook: The growth path that we have pursued will continue. Our expectation
is that we should grow slightly above the industry average, which means around 24%.
Our topline growth has been just about that of the industry. We would take corrective
measures and ensure that we outperform the industry.
2. Build on retail banking: SBI was eminently successful as a corporate bank. So we
would like to expand and consolidate that franchise. Till about four years back, it was not
a leader in retail, at least in the lending side. Now that we have assumed or we have
been catapulted to the leadership position, we would like to consolidate our gains and
increase the leadership from the second further.
3. Non-performing loans: There has been some acceleration on the non-performing
assets on a comparative basis. We will take a breather to analyse and take appropriate
corrective measures to make sure that the NPA percentages are better than the industry
average.
4. Dual rate home loans: On this, we will have a dialogue with the Reserve Bank and the
final course that we would adopt would be a compromise and would recognize both the
objectives of delivering value to the home owner and sufficiently address the concerns of
the regulator.
Mr. Hemant Contractor (MD, SBI): We’ll need around Rs210bn capital in next threefour
years (click). Interesting comments in the interview:
1. Non-performing loans: In terms of other NPA parameters, too, we have started
showing an improvement. We expect this to continue in the current year as well. All our
branches have been activated to look at the NPAs more closely and special teams have
been deployed to oversee the high value NPAs.
2. Capital raising: Given our current rate of growth, we will need around Rs210bn in the
next three to four years. Rights issue is what we have in mind now.
3. Telecom exposures: We are not overly concerned about our exposure to the telecom
sector. Unfortunately, what we have seen in the recent past is because of these issues,
companies have gone into a shell. No new proposals are coming. But if a viable good
proposal comes to us, we will still look at it.
Ms. Roopa Kudva (MD & CEO, Crisil): Profitability of companies will be under pressure
(click)
Ratings went up because of healthy demand and strong funding environment. A lot of
companies took advantage of strong equity markets and mobilised money from equity
markets. What is changing now is the consumption demand that is somewhat going to
moderate. We also see profitability under pressure because input costs are going up.
Industry Interactions
ICICI Bank (ICICI Bank– Rs1,117 – BUY)
Management:
Mr. Rakesh Jha (Dy. CFO)
1. On a sustainable basis, liquidity is likely to remain in deficit and expect it
to get tighter from June onwards.
2. Yield curve may turn from being inverted to being flattish- longer term
rates to be stable, but expect some correction in short-term rates.
3. Bank is targeting loan growth of ~20% led by growth in corporate loans
(project financing and working capital) and share of retail loans may
continue to decline.
4. Bank is targeting deposit growth of ~20% and CASA growth of ~25%.
5. In FY12 margins would be stable in the range of 2.6-2.7%. In FY13
margins may expand led by expansion in domestic margins and expansion
in international spreads.
6. Within ICICI’s standalone book, overseas loans form ~25% of total and
growth is likely to remain healthy in this segment. But growth of UK and
Canadian subsidiaries may be low due to tighter regulatory landscape.
7. Slippages remain low and NPL provisioning would decline from 3QFY11
level of Rs4.6bn.
8. Micro-finance loans are Rs15bn (70bps of loans) of which Rs2-3bn is the
form of purchase of securitised portfolios.
9. Fee and operating cost growth to be in line with balance sheet growth.
10. BOR integration is still underway, but progress is inline with targets.
Bank of India (BOI IN – Rs479– O-PF)
Management:
Mr. Ravi Kumar (General Manager and CFO)
1. Bank of India (BOI) is making certain organisation changes that involve
setting-up of various verticals across key segments of loans, deposits,
asset quality/ recovery and fee income.
2. During FY12, management expects 18-20% growth in sector’s credit and
BoI should report a faster credit growth.
3. BOI’s loan growth will be driven by faster growth in SME/ mid-corporate,
retail and rural portfolios whereas the share of loans to large corporate
may decline.
4. BOI is looking to expand share in higher yielding assets in order to drive
loan growth as well as maintain margins.
5. CASA deposit growth has remained healthy, but CASA ratio may moderate
as some customers convert savings deposits to term deposits.
6. Margins are likely to remain under pressure due to rise in cost of term
deposits and decline in share of CASA deposits.
7. Management expects that RBI will continue to raise policy rates, but a 50-
75bps hike in policy rates should not materially impact investment cycle.
8. In the wholesale market, rates could correct in the light of ease in liquidity
conditions. One year wholesale rates may stabilise in the range of 8.5-9%
and this could drive normalisation of the yield curve.
9. Banks are unlikely to lower their retail term deposit rates, except for small
adjustments in short-term buckets.
10. BOI is yet to finalise its liability under second pension option and expects to
disclose this along with 4Q results.
11. PSU banks have yet not decided on the policy to write-off (or not) the 2nd
pension liability relating to retired employees. Indian Banks’ Association is
in discussion with RBI to allow banks to amortise this liability over a 5 year
period- as is the norm for liability towards employees in service.
12. During FY12, BOI may hire nearly 5,000 new employees (current base of
~40K), but net addition is likely to be nearly 2,500.
13. On a structural basis, management expects employee costs to grow at
annualised rate of 15% and other operating costs to grow at 10%.
14. Asset quality remains stable and management does not expect much
slippage from the restructured loans. Nearly 90% of restructured loans are
now out of the moratorium period and honouring their obligations.
Crisil (CRISIL IN – Rs6,556 – No Rec)
Management:
Ms. Roopa Kudva (MD & CEO, Crisil) and team at analyst meet
1. During 2010, Crisil reported a healthy ~20% growth in revenues driven
by growth in revenues linked to bank rating linked (BLR) services and
research division.
2. Crisil continues to be the market leader in the rating market with 51%
share in total ratings in 2010.
3. Bank-rating linked revenues still offer a strong growth opportunity as a
large majority of SMEs are still not rated. Growth in Crisil’s BLR revenues
is being driven by growth in small ticket size clients (growing by 20-40%)
which is offsetting modest growth of 3-4% in large sized clients.
4. In order to capitalise on large pool of unrated SMEs, Crisil has expanded
its presence to nearly 150 towns.
5. The bond rating revenues have been low due to lesser bond issuances in
recent months (largely a reflection of high rates and inverted yield curve)
and high competition in a small corporate debt market.
6. On the research side, company is investing in expanding team as well as
presence across geographies- it is now present in Argentina, Poland and
China.
7. Management believes that key drivers of growth would be acquisition of
new clients and development of new products.
8. Crisil plans to launch a rating product for real estate sector and education
institutions.
9. While credit rating is not compulsory for the small scale industries (SSI),
but government is encouraging credit rating by offering some subsidy for
the first rating. Banks also offer some concession on interest rate to such
borrowers. This is driving growth in new clients. More importantly, nearly
half of clients tend to renew credit rating, even though there is no
government subsidy for renewal fees.
10. Over past year, credit rating upgrades have been higher than rating
downgrades. It appears that this ratio has peaked and could potentially
decline as corporate profitability is under pressure of rise prices of
commodities and interest rates. The buoyancy in consumption demand is
the key support.
IDFC (IDFC IN – Rs156 – BUY)
Management:
Mr. Rajiv Lall (MD and CEO)
1. While the long-term requirement of investment in infrastructure is large,
especially from sectors like power, ports, roads and urban infrastructure
there has been some slowdown in sanctions due to multiple factors like
political imbroglio, high commodity prices, rising interest rates.
2. IDFC is confident of delivering 30-40% Cagr in assets over 3-4 years driven
by pipeline of sanctions and long-term demand for infrastructure.
3. But growth may be uneven and would be influenced by outlook of
corporate India to investment in infrastructure and capex.
4. Management believes that banks are facing caps on exposure norms that is
enabling IDFC to gain market share.
5. Spreads are likely to stabilise at current levels, but margins may compress
as leverage rises from ~5x presently to ~7x over next three years.
6. The rise in gearing will pull down ROA and drive expansion in ROE.
7. Asset quality is comfortable and IDFC has negligible exposure to risky
segments.
REC (RECL – Rs235 – O-PF)
Management:
Mr. H D Khunteta (CMD and Director Finance)
1. During FY11, REC expects to see 22-24% growth in loans. Most of the
sanctioned projects have complete clearances.
2. Participation in consortium helps meet exposure norms and that's why
REC will be part of most consortiums.
3. T&D capex has faced some delays in certain states which resulted in
lower disbursals in FY11. However, this is likely to pick-up in FY12.
4. Funding cost for long term loans has risen by 20-40bps on incremental
basis.
5. REC generally raises Rs30-40bn annually through issue of capital gains
tax exemption bonds, but this year the demand is higher.
6. Duration of assets and liabilities is well matched- average duration of
assets is 6 years and of liabilities is nearly 5 years.
7. REC does not carry and surplus liquidity and uses the working capital
lines mostly from banks.
8. REC would not need to raise fresh capital for the next 2 years.
Insurance sector– NBP degrowing
During Feb-11, annualised NBP of sector declined by 9% YoY (compared
to 5% decline in Jan-11), primarily due to 33% YoY decline in NBP of
private sector whereas LIC reported 19% growth. Among the private
insurers MNYL reported growth, but ICICI, HDFC and SBI reported a
decline. During 11MFY11, annualised NBP has grown by 19% YoY, led by
LIC’s stellar 61% growth that has offset 15% decline in private sector’s
NBP. With NBP declining largely due to changes in regulatory framework,
it will now be important for insurance companies to improve conservation
ratio and lower the operating costs.
Sector NBP declines; LIC continues to outperform
In Feb-11, NBP for the sector declined by 9% YoY, primarily due to by 33% YoY
decline in NBP of private insurers.
On the other hand, LIC continued to grow ahead of the sector and reported 19%
YoY growth in NBP that pushed-up its market share to 61%.
During 11MFY11, NBP of sector grew by 19% YoY, led by 61% growth for LIC. But
private sector’s premiums declined by 15%.
MNYL only leading private player to report growth
During Feb-11, MNYL reported a strong 33% YoY growth in annualised NBP. ING
Vysya Life also reported 20% growth.
All the other incumbent private insurers reported decline in premiums, even the
newer life insurers have been reporting YoY decline over recent months.
ICICI Pru Life’s annualised NBP continued to decline by +50% YoY which reflects on
the high proportion of Ulips in its new business (96% in FY10).
During 11MFY11, ICICI’s premiums have declined by 13% YoY, inline with our
estimates for FY11, but trend during the month of March will be crucial.
SBI reported 11% YoY drop during Feb-11 and 33% in 11MFY11; higher share of
group insurance has been a key to sharper swings in its NBP.
HDFC Life also reported a 28% drop in NBP (first drop since Sep-09), but its growth
of 24% during 11MFY11 is among the highest for private insurers.
Premiums for other leading private insurers also declined- Reliance Life (down
58%), Bajaj Allianz (down 39% YoY) and Birla Sun Life (down 30%).
Conservation ratio and cost control will be critical
With NBP being low due to changes in regulations, it will now be important for
insurance companies to improve conservation ratio and lower the operating costs.
Among large players, SBI, Birla, Reliance and ICICI had conservation ratio lower
than the sector average of 68%; LIC, MNYL and Tata fare better.
On the cost front, we believe that LIC, ICICI and SBI are better placed with very
low cost ratio of 1-5% of AUM. However, MNYL, Reliance and most of the smaller
players and new entrants have a high operating cost base.
Take a look!
RBI published the recommendations from an internal committee on
procedures that RBI could follow regarding management of monetary
conditions and deliberation of monetary policy.
The suggestions are mostly ‘functional’, so would not impact the monetary
policy actions per se. These are currently in the draft stage and RBI is open to
receiving suggestions from the public.
The three key elements from the note and our comments (in italics)
are:
“The repo rate should be the single policy rate to unambiguously signal
the stance of monetary policy to achieve macroeconomic objectives of
growth with price stability. It will operate within a corridor set by the
Bank Rate and the reverse repo rate. As the repo rate changes, the Bank
Rate and the reverse repo rate should change automatically.”
o The committee has recommended that if say the repo rate is set
at 500bps, then Base rate would be 550bps and reverse repo rate
would be 400bps
o Mostly procedural, hence no impact
Recommendations on liquidity management
o “LAF should operate in a deficit liquidity mode and the liquidity
level should be contained around (+)/(-) one per cent of net
demand and time liabilities (NDTL) of banks for optimal monetary
transmission”- RBI currently observes a similar policy, hence no
impact
o “Persistent liquidity in excess of (+) / (-) one per cent of the
NDTL should be managed through other instruments.” An
incrementally positive suggestion to make liquidity management
more responsive
o “To improve liquidity management, a scheme of auctioning of
government surplus cash balance at the discretion of the Reserve
Bank be put in place in consultation with the Government.” An
incrementally positive suggestion as it offers a new source of
liquidity, as and when required
o In this regard, it needs to be appreciated that RBI has been
making adequate liquidity available to the system through the
repo window. Hence, liquidity has always been available, but has
become costlier for banks.
“The minimum level of reserves to be maintained on any day by banks
with the Reserve Bank during a fortnight should be raised from the
present level of 70% to 80% of the required cash reserve ratio (CRR).”
This should not have much impact as banks are anyway holding CRR on a
daily average basis for each fortnight.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key takeaways- management meeting and interviews
Round up on news flows- regulatory and company-specific
Banking sector round-up- Credit growth, interest rates and liquidity
Update on insurance and mutual funds– Flow, market share
Valuation– Price performance, comparative matrix, P/B band charts
Take a look!, ‘Banking Calendar’, links to our recent reports
Takeaways-management meeting and interviews
In our meetings, banks reiterated that credit growth over recent months has been
led by demand for working capital loan that has offset some moderation in growth
of loans to infrastructure sector- this also corroborates with our analysis of trends
in credit growth (click for note). While liquidity has eased driving fall in wholesale
borrowing costs, banks expect liquidity to remain in deficit, though at lower levels
compared to levels seen in 4QFY11. Banks do not foresee much change to retail
deposit rates as high inflation is likely to keep policy and market rates high. Rise
in term deposit rates, which is also driving shift of CASA to term deposits, will put
margins under pressure. Most banks are comfortable about future asset quality
trends, but our recent interaction with a credit rating agency indicates that ratio of
credit rating upgrades versus downgrades has peaked and there is a risk of
reversal in this trend- which could be potential risk to asset quality.
Sector round-up– Banks lead market rally
Over past month, Sensex has moved-up by 9% supported by outperformance by
banks and NBFCs that constitute 25% of index and rose by ~11%. Among the
financials, wholesale funded banks and NBFCs have outperformed. As the 4QFY11
reporting season kicks-off, we expect sector’s price performance to be driven by a
combination of quality of results in the financial sector as well as that of other
sectors. During 4Q, we expect banks to report 31% YoY growth in profit (among
highest vis-à-vis other sectors), boosted healthy growth in core income and a low
base. Key trends to watch would be (1) loan growth, (2) CASA growth, (3)
margins, (4) asset quality and (5) provisioning for pension liabilities.
Update on insurance and mutual funds- Feb-11/ Mar-11
During Feb-11, NBP of sector declined by 9% YoY, due to 33% YoY decline in NBP
of private sector whereas LIC reported 19% growth. Among private insurers only
MNYL reported growth while ICICI, HDFC and SBI reported a decline. In Mar-11,
AUMs of mutual funds fell by 16% MoM to Rs6tn (-4% YoY) due to redemption
from debt schemes (partly seasonal for March) and low inflows in equity schemes.
Charts of month: Loan growth in key segments: Rise in demand for working capital
Regulatory and sector newsflows
As per the budget for FY12, government is likely to raise Rs3.4tn through issue of GSecs;
the amount of net borrowings is flat YoY. Of the total borrowing, the government
plans to complete nearly 60% during 1HFY12.
RBI has extended the additional liquidity support under the Liquidity Adjustment
Facility (LAF) up to 6th May 2011.
The government has infused Rs124bn as equity capital in 15 PSU banks to shore-up
their capital adequacy and government’s shareholding in these banks.
The government has relaxed the norms for appointment as Chairman and Managing
director (CMD) at public sector undertaking (PSU) banks. To be eligible for appointment
as CMD, a person will now require at least 18 months of residual service and six
months experience as an Executive Director (ED). Earlier, the person was required to
have at least two years of residual service and one-year stint as an ED.
RBI has permitted NBFCs to include loans to ‘telecom tower’ companies in their
infrastructure loan portfolio. This will help infrastructure finance companies (IFC) to
enhance their reported share of infrastructure loans.
The government has raised cap on FII investment in corporate bonds issued by
infrastructure companies from US$5bn to US$25bn. Consequently, total cap on FII
investment in corporate bonds has been raised from US$20bn to US$40bn.
As a part of restructuring of Kingfisher Airlines’ debt, 13 banks have been allocated
equity shares in the company and now collectively hold 23% stake in the company. The
shares have been priced at Rs64.5 (inline with SEBI norms), but are at premium to the
market price of Rs41 on 31st March (issue date). As a result, banks should see markto-
market (MTM) losses on these shares.
Company newsflows
Mr. Pratip Chaudhuri has been appointed the Chairman of State Bank of India. The
three new Managing Directors would be Mr. Diwakar Gupta, Mr. Hemant Contractor and
Mr. A Krishna Kumar. Mr. R Sridharan has been the longest serving MD at the bank.
Central Bank of India has raised Rs25bn through a rights issue of equity shares at a
price of Rs103/ share.
IDFC has raised Rs2.3bn in the third tranche of retail infrastructure bonds. In the two
previous tranches, the company had raised Rs13bn.
As per media reports RBI has requested the government to consider the application of
Turkish bank Bank Asya to launch Islamic banking in India.
RBI has asked Axis Bank to justify the valuation of Rs20bn for acquisition of Enam.
Bank of Baroda plans to expand operations in New Zealand through a branch in
Auckland; it currently has 70 offices in 24 countries.
Interesting interviews
Mr. Pratip Chaudhuri (SBI’s new Chairman) (click here for news article): Key comments
1. Growth outlook: The growth path that we have pursued will continue. Our expectation
is that we should grow slightly above the industry average, which means around 24%.
Our topline growth has been just about that of the industry. We would take corrective
measures and ensure that we outperform the industry.
2. Build on retail banking: SBI was eminently successful as a corporate bank. So we
would like to expand and consolidate that franchise. Till about four years back, it was not
a leader in retail, at least in the lending side. Now that we have assumed or we have
been catapulted to the leadership position, we would like to consolidate our gains and
increase the leadership from the second further.
3. Non-performing loans: There has been some acceleration on the non-performing
assets on a comparative basis. We will take a breather to analyse and take appropriate
corrective measures to make sure that the NPA percentages are better than the industry
average.
4. Dual rate home loans: On this, we will have a dialogue with the Reserve Bank and the
final course that we would adopt would be a compromise and would recognize both the
objectives of delivering value to the home owner and sufficiently address the concerns of
the regulator.
Mr. Hemant Contractor (MD, SBI): We’ll need around Rs210bn capital in next threefour
years (click). Interesting comments in the interview:
1. Non-performing loans: In terms of other NPA parameters, too, we have started
showing an improvement. We expect this to continue in the current year as well. All our
branches have been activated to look at the NPAs more closely and special teams have
been deployed to oversee the high value NPAs.
2. Capital raising: Given our current rate of growth, we will need around Rs210bn in the
next three to four years. Rights issue is what we have in mind now.
3. Telecom exposures: We are not overly concerned about our exposure to the telecom
sector. Unfortunately, what we have seen in the recent past is because of these issues,
companies have gone into a shell. No new proposals are coming. But if a viable good
proposal comes to us, we will still look at it.
Ms. Roopa Kudva (MD & CEO, Crisil): Profitability of companies will be under pressure
(click)
Ratings went up because of healthy demand and strong funding environment. A lot of
companies took advantage of strong equity markets and mobilised money from equity
markets. What is changing now is the consumption demand that is somewhat going to
moderate. We also see profitability under pressure because input costs are going up.
Industry Interactions
ICICI Bank (ICICI Bank– Rs1,117 – BUY)
Management:
Mr. Rakesh Jha (Dy. CFO)
1. On a sustainable basis, liquidity is likely to remain in deficit and expect it
to get tighter from June onwards.
2. Yield curve may turn from being inverted to being flattish- longer term
rates to be stable, but expect some correction in short-term rates.
3. Bank is targeting loan growth of ~20% led by growth in corporate loans
(project financing and working capital) and share of retail loans may
continue to decline.
4. Bank is targeting deposit growth of ~20% and CASA growth of ~25%.
5. In FY12 margins would be stable in the range of 2.6-2.7%. In FY13
margins may expand led by expansion in domestic margins and expansion
in international spreads.
6. Within ICICI’s standalone book, overseas loans form ~25% of total and
growth is likely to remain healthy in this segment. But growth of UK and
Canadian subsidiaries may be low due to tighter regulatory landscape.
7. Slippages remain low and NPL provisioning would decline from 3QFY11
level of Rs4.6bn.
8. Micro-finance loans are Rs15bn (70bps of loans) of which Rs2-3bn is the
form of purchase of securitised portfolios.
9. Fee and operating cost growth to be in line with balance sheet growth.
10. BOR integration is still underway, but progress is inline with targets.
Bank of India (BOI IN – Rs479– O-PF)
Management:
Mr. Ravi Kumar (General Manager and CFO)
1. Bank of India (BOI) is making certain organisation changes that involve
setting-up of various verticals across key segments of loans, deposits,
asset quality/ recovery and fee income.
2. During FY12, management expects 18-20% growth in sector’s credit and
BoI should report a faster credit growth.
3. BOI’s loan growth will be driven by faster growth in SME/ mid-corporate,
retail and rural portfolios whereas the share of loans to large corporate
may decline.
4. BOI is looking to expand share in higher yielding assets in order to drive
loan growth as well as maintain margins.
5. CASA deposit growth has remained healthy, but CASA ratio may moderate
as some customers convert savings deposits to term deposits.
6. Margins are likely to remain under pressure due to rise in cost of term
deposits and decline in share of CASA deposits.
7. Management expects that RBI will continue to raise policy rates, but a 50-
75bps hike in policy rates should not materially impact investment cycle.
8. In the wholesale market, rates could correct in the light of ease in liquidity
conditions. One year wholesale rates may stabilise in the range of 8.5-9%
and this could drive normalisation of the yield curve.
9. Banks are unlikely to lower their retail term deposit rates, except for small
adjustments in short-term buckets.
10. BOI is yet to finalise its liability under second pension option and expects to
disclose this along with 4Q results.
11. PSU banks have yet not decided on the policy to write-off (or not) the 2nd
pension liability relating to retired employees. Indian Banks’ Association is
in discussion with RBI to allow banks to amortise this liability over a 5 year
period- as is the norm for liability towards employees in service.
12. During FY12, BOI may hire nearly 5,000 new employees (current base of
~40K), but net addition is likely to be nearly 2,500.
13. On a structural basis, management expects employee costs to grow at
annualised rate of 15% and other operating costs to grow at 10%.
14. Asset quality remains stable and management does not expect much
slippage from the restructured loans. Nearly 90% of restructured loans are
now out of the moratorium period and honouring their obligations.
Crisil (CRISIL IN – Rs6,556 – No Rec)
Management:
Ms. Roopa Kudva (MD & CEO, Crisil) and team at analyst meet
1. During 2010, Crisil reported a healthy ~20% growth in revenues driven
by growth in revenues linked to bank rating linked (BLR) services and
research division.
2. Crisil continues to be the market leader in the rating market with 51%
share in total ratings in 2010.
3. Bank-rating linked revenues still offer a strong growth opportunity as a
large majority of SMEs are still not rated. Growth in Crisil’s BLR revenues
is being driven by growth in small ticket size clients (growing by 20-40%)
which is offsetting modest growth of 3-4% in large sized clients.
4. In order to capitalise on large pool of unrated SMEs, Crisil has expanded
its presence to nearly 150 towns.
5. The bond rating revenues have been low due to lesser bond issuances in
recent months (largely a reflection of high rates and inverted yield curve)
and high competition in a small corporate debt market.
6. On the research side, company is investing in expanding team as well as
presence across geographies- it is now present in Argentina, Poland and
China.
7. Management believes that key drivers of growth would be acquisition of
new clients and development of new products.
8. Crisil plans to launch a rating product for real estate sector and education
institutions.
9. While credit rating is not compulsory for the small scale industries (SSI),
but government is encouraging credit rating by offering some subsidy for
the first rating. Banks also offer some concession on interest rate to such
borrowers. This is driving growth in new clients. More importantly, nearly
half of clients tend to renew credit rating, even though there is no
government subsidy for renewal fees.
10. Over past year, credit rating upgrades have been higher than rating
downgrades. It appears that this ratio has peaked and could potentially
decline as corporate profitability is under pressure of rise prices of
commodities and interest rates. The buoyancy in consumption demand is
the key support.
IDFC (IDFC IN – Rs156 – BUY)
Management:
Mr. Rajiv Lall (MD and CEO)
1. While the long-term requirement of investment in infrastructure is large,
especially from sectors like power, ports, roads and urban infrastructure
there has been some slowdown in sanctions due to multiple factors like
political imbroglio, high commodity prices, rising interest rates.
2. IDFC is confident of delivering 30-40% Cagr in assets over 3-4 years driven
by pipeline of sanctions and long-term demand for infrastructure.
3. But growth may be uneven and would be influenced by outlook of
corporate India to investment in infrastructure and capex.
4. Management believes that banks are facing caps on exposure norms that is
enabling IDFC to gain market share.
5. Spreads are likely to stabilise at current levels, but margins may compress
as leverage rises from ~5x presently to ~7x over next three years.
6. The rise in gearing will pull down ROA and drive expansion in ROE.
7. Asset quality is comfortable and IDFC has negligible exposure to risky
segments.
REC (RECL – Rs235 – O-PF)
Management:
Mr. H D Khunteta (CMD and Director Finance)
1. During FY11, REC expects to see 22-24% growth in loans. Most of the
sanctioned projects have complete clearances.
2. Participation in consortium helps meet exposure norms and that's why
REC will be part of most consortiums.
3. T&D capex has faced some delays in certain states which resulted in
lower disbursals in FY11. However, this is likely to pick-up in FY12.
4. Funding cost for long term loans has risen by 20-40bps on incremental
basis.
5. REC generally raises Rs30-40bn annually through issue of capital gains
tax exemption bonds, but this year the demand is higher.
6. Duration of assets and liabilities is well matched- average duration of
assets is 6 years and of liabilities is nearly 5 years.
7. REC does not carry and surplus liquidity and uses the working capital
lines mostly from banks.
8. REC would not need to raise fresh capital for the next 2 years.
Insurance sector– NBP degrowing
During Feb-11, annualised NBP of sector declined by 9% YoY (compared
to 5% decline in Jan-11), primarily due to 33% YoY decline in NBP of
private sector whereas LIC reported 19% growth. Among the private
insurers MNYL reported growth, but ICICI, HDFC and SBI reported a
decline. During 11MFY11, annualised NBP has grown by 19% YoY, led by
LIC’s stellar 61% growth that has offset 15% decline in private sector’s
NBP. With NBP declining largely due to changes in regulatory framework,
it will now be important for insurance companies to improve conservation
ratio and lower the operating costs.
Sector NBP declines; LIC continues to outperform
In Feb-11, NBP for the sector declined by 9% YoY, primarily due to by 33% YoY
decline in NBP of private insurers.
On the other hand, LIC continued to grow ahead of the sector and reported 19%
YoY growth in NBP that pushed-up its market share to 61%.
During 11MFY11, NBP of sector grew by 19% YoY, led by 61% growth for LIC. But
private sector’s premiums declined by 15%.
MNYL only leading private player to report growth
During Feb-11, MNYL reported a strong 33% YoY growth in annualised NBP. ING
Vysya Life also reported 20% growth.
All the other incumbent private insurers reported decline in premiums, even the
newer life insurers have been reporting YoY decline over recent months.
ICICI Pru Life’s annualised NBP continued to decline by +50% YoY which reflects on
the high proportion of Ulips in its new business (96% in FY10).
During 11MFY11, ICICI’s premiums have declined by 13% YoY, inline with our
estimates for FY11, but trend during the month of March will be crucial.
SBI reported 11% YoY drop during Feb-11 and 33% in 11MFY11; higher share of
group insurance has been a key to sharper swings in its NBP.
HDFC Life also reported a 28% drop in NBP (first drop since Sep-09), but its growth
of 24% during 11MFY11 is among the highest for private insurers.
Premiums for other leading private insurers also declined- Reliance Life (down
58%), Bajaj Allianz (down 39% YoY) and Birla Sun Life (down 30%).
Conservation ratio and cost control will be critical
With NBP being low due to changes in regulations, it will now be important for
insurance companies to improve conservation ratio and lower the operating costs.
Among large players, SBI, Birla, Reliance and ICICI had conservation ratio lower
than the sector average of 68%; LIC, MNYL and Tata fare better.
On the cost front, we believe that LIC, ICICI and SBI are better placed with very
low cost ratio of 1-5% of AUM. However, MNYL, Reliance and most of the smaller
players and new entrants have a high operating cost base.
Take a look!
RBI published the recommendations from an internal committee on
procedures that RBI could follow regarding management of monetary
conditions and deliberation of monetary policy.
The suggestions are mostly ‘functional’, so would not impact the monetary
policy actions per se. These are currently in the draft stage and RBI is open to
receiving suggestions from the public.
The three key elements from the note and our comments (in italics)
are:
“The repo rate should be the single policy rate to unambiguously signal
the stance of monetary policy to achieve macroeconomic objectives of
growth with price stability. It will operate within a corridor set by the
Bank Rate and the reverse repo rate. As the repo rate changes, the Bank
Rate and the reverse repo rate should change automatically.”
o The committee has recommended that if say the repo rate is set
at 500bps, then Base rate would be 550bps and reverse repo rate
would be 400bps
o Mostly procedural, hence no impact
Recommendations on liquidity management
o “LAF should operate in a deficit liquidity mode and the liquidity
level should be contained around (+)/(-) one per cent of net
demand and time liabilities (NDTL) of banks for optimal monetary
transmission”- RBI currently observes a similar policy, hence no
impact
o “Persistent liquidity in excess of (+) / (-) one per cent of the
NDTL should be managed through other instruments.” An
incrementally positive suggestion to make liquidity management
more responsive
o “To improve liquidity management, a scheme of auctioning of
government surplus cash balance at the discretion of the Reserve
Bank be put in place in consultation with the Government.” An
incrementally positive suggestion as it offers a new source of
liquidity, as and when required
o In this regard, it needs to be appreciated that RBI has been
making adequate liquidity available to the system through the
repo window. Hence, liquidity has always been available, but has
become costlier for banks.
“The minimum level of reserves to be maintained on any day by banks
with the Reserve Bank during a fortnight should be raised from the
present level of 70% to 80% of the required cash reserve ratio (CRR).”
This should not have much impact as banks are anyway holding CRR on a
daily average basis for each fortnight.
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