Goldman Sachs:: Banks- ECBs on a comeback, but we still expect domestic credit growth

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India: Banks
Equity Research
ECBs on a comeback, but we still expect domestic credit growth
ECB inflows starting to gain traction
Over the past few quarters, ECB net inflows have picked up significantly
and as of 9MFY11 stood at 8.2% of incremental bank credit vs 2.8% in
FY2010. With the interest rate differential between PLR and US 5-year
swaps reaching new peaks post recent rate hikes, we believe corporates
may incrementally explore ECBs for debt financing.

ECB rates at a slight premium to domestic rates for now
We estimate the landed rates of ECBs (post hedging costs and withholding
taxes) to be anywhere between 9.5%-10% for a AAA borrower, and closer
to the prevailing base rate range of 9.25%-10% for key banks. ECBs are
therefore still not as attractive but liquidity tightening may lead banks and
corporates to tap this route.  Our recent discussions with banks indicate
that they are already tapping this route in anticipation of increased demand
from corporates.
We still forecast domestic credit growth to be 18%-20%
ECBs inflows at 8% of incremental credit is still a far cry away from the 20%
witnessed in FY08 (as a result of strong international liquidity) and we
don’t believe that the record levels of FY08 will be repeated. Our GS Global
ECS Research team continues to forecast system credit growth in FY12E of
18%-20%. We believe there could be a potential downside risk to our
system credit growth estimate if the interest rate differential widens
further.