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India Banks
RBI policy: An overhang for the sector
Event
 RBI has released its FY12 annual monetary policy and has raised benchmark
rates by 50bps. We present our thoughts below.
Impact
 The big development – savings rate hiked by 50bps: What is the impact?
The earnings impact for banks is roughly 4–8% on a ceteris paribus basis.
The impact on NIMs would be 10–15bps. Clearly banks with high SA (savings
accounts) will be affected the most – the worst being SBI, which has 38% SA.
PSU banks will be more affected because they have a larger proportion of
margin dependent income. Banks may momentarily raise minimum balance,
fees and charges. However, if the charges are high, RBI might come down
heavily on them.

 Repo rate hiked by 50bps – What is going to happen to lending and
deposit rates? For the moment, nothing much. Deposit rates have already
gone up 300bps (400bps if you take bulk deposit rates) and lending rates
have gone up 175–200bps. We believe RBI may be behind the curve as
policy rates since April are up 225bps after this hike. We don’t think lending
and deposit rates at least will be tinkered with for the next 3–6 months. Credit
growth is slowing down and moreover, 1QFY12 is a very weak quarter for
credit and with deposit growth already up to 17.5% and credit growth coming
down to 18% levels by June/July, the gap will also be bridged.
 MFI recommendations – Positive for SKS but PSL regulations to change:
We view this a bit positively for MFIs as most of Malegam committee
recommendations have been retained. In fact, the positive thing is that weekly
repayment is also fine – something which the Andhra Pradesh state
government has been against. Interest rate cap is at 26% and margin cap at
12% is needed for PSL status. The critical factor is that PSL (priority sector
lending) status has been retained for MFI loans. However, RBI has decided to
appoint a committee to re-examine the existing classification and suggest
revised guidelines with regard to priority sector lending classification. This
could be a big hangover for the NBFC sector, in our view.
 Change in provisioning guidelines – Impact would not be very
significant: For restructured assets, provisioning has been increased from
40bps to 200bps for the first two years. Earnings impact would be 2–4%.
Provisioning for NPLs has also been enhanced for different NPL categories.
However, we believe that would not have a negative impact on earnings as
banks already have sufficient coverage at this point.
Outlook
 Wait for 1QFY12: That will likely bear the brunt of all bad numbers – NIMs,
loan growth, asset quality, etc. – let the worst quarter pass. We do believe
that there is further downside for the stocks from these levels. However, from
a 12 month perspective, valuations are beginning to look too cheap now. The
policy does put more pressure on earnings. The real positive surprise on
earnings could happen in the second half – due to opex and credit costs. We
stay underweight on the PSU banks for the time being and go long on select
private banks like HDFC Bank.