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Indian Bank
Repo rate and savings rate rise - Negative for the
sector
• RBI surprised with a 50bp increase in the savings rate and a higherthan-
expected 50bp rise in the repo rate, and also tightened
provisioning norms for banks. Key highlights:
• Repo rate raised by 50bp to 7.25%: The increase was at the high end
of the expectations band. We think short-term rates will nevertheless
settle at 9.25-9.50% (9.75% now, 10-10.25% during 4Q FY11) and this
rise will serve to tighten the spread between repo-deposit rate spread.
• Savings rates upped by 50bp: This was a negative surprise. We
estimate a ~8-13bp impact on NIMs and 3-8% impact on PBT with a 3-
5% PBT impact for private banks and 5-8% impact for PSU banks. The
banks most affected are those with high SA ratios and low ROAs.
• NPL provisioning norms tightened: After doing away with the
arbitrary 70% rule the week before last, the provisioning norms (IRAC
norms) have been tightened and a new 2% provision has been introduced
on all restructured loans. Most banks hold provisions in excess of IRAC
norms, so we do not think this will have a major impact.
• Microfinance-Malegam committee recommendations broadly
accepted: Banks’ exposure to MFIs will continue to be classified as a
priority sector. We remain cautious on the sector because a) some of the
RBI norms are difficult and expensive to implement, and b) there is no
certainty that the AP government will dilute its stand on the sector.
• Our view: We believe the saving savings bank rate increase could lead
to some lending rate increases, and we expect a marginal upward bias to
rates. Ai increase in savings rate would affect PSUs’ profitability more
than private banks’, given their low ROAs. Any further correction from
here would represent a buying opportunity, in our view, as we forecast
a soft landing and inflation easing in 2H FY12, so we do not expect
lending/deposit rates to significantly spike from here. Our top picks are
ICICI, IndusInd and HDFCB, and our least preferred stocks are BOI,
BOB, IDFC and Axis.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Bank
Repo rate and savings rate rise - Negative for the
sector
• RBI surprised with a 50bp increase in the savings rate and a higherthan-
expected 50bp rise in the repo rate, and also tightened
provisioning norms for banks. Key highlights:
• Repo rate raised by 50bp to 7.25%: The increase was at the high end
of the expectations band. We think short-term rates will nevertheless
settle at 9.25-9.50% (9.75% now, 10-10.25% during 4Q FY11) and this
rise will serve to tighten the spread between repo-deposit rate spread.
• Savings rates upped by 50bp: This was a negative surprise. We
estimate a ~8-13bp impact on NIMs and 3-8% impact on PBT with a 3-
5% PBT impact for private banks and 5-8% impact for PSU banks. The
banks most affected are those with high SA ratios and low ROAs.
• NPL provisioning norms tightened: After doing away with the
arbitrary 70% rule the week before last, the provisioning norms (IRAC
norms) have been tightened and a new 2% provision has been introduced
on all restructured loans. Most banks hold provisions in excess of IRAC
norms, so we do not think this will have a major impact.
• Microfinance-Malegam committee recommendations broadly
accepted: Banks’ exposure to MFIs will continue to be classified as a
priority sector. We remain cautious on the sector because a) some of the
RBI norms are difficult and expensive to implement, and b) there is no
certainty that the AP government will dilute its stand on the sector.
• Our view: We believe the saving savings bank rate increase could lead
to some lending rate increases, and we expect a marginal upward bias to
rates. Ai increase in savings rate would affect PSUs’ profitability more
than private banks’, given their low ROAs. Any further correction from
here would represent a buying opportunity, in our view, as we forecast
a soft landing and inflation easing in 2H FY12, so we do not expect
lending/deposit rates to significantly spike from here. Our top picks are
ICICI, IndusInd and HDFCB, and our least preferred stocks are BOI,
BOB, IDFC and Axis.
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