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UBS Investment Research
India Banking & Finance Sector
O peration inflation
Event: RBI hikes policy rates by 50 bps
In its monetary review today RBI has hiked repo rates and reverse repo rates by 50
bps to 7.25% and 6.25% respectively. RBI has also hiked the savings bank deposit
rates by 50 bps to 4%. The central bank has also hiked provisioning requirements
across various categories of NPA and has instilled higher provisions of 2% on
restructured loans.
Impact: Banks may choose to save margins over growth in the near term
In the absence of lending rate hikes, a 50 bps increase in SBA rate would reduce
earnings for PSU banks by 5-7% and for private banks by 1-4%. However, we
expect banks to raise lending rate to protect near term margins, which in turn
would slow loan growth in FY12/13. New provisioning requirements on NPL and
restructured loan would partly offset the benefit of relaxation announced by RBI
last week. (Please refer our note dated 27th Jan’11 “Entering the second stage of
tightening”)
Action: Remain cautious on the sector
We remain cautious second stage of tightening is negative for banks’ profitability
and share price performance due to implication on growth/NIMs. Our base case
estimate of lower credit costs could be at risk if growth slows materially in FY12.
We prefer ICICIBC, Federal, Indus Ind
We would turn bullish if inflation (or crude) declines or stocks correct to historical
average levels (say 8-10% from current levels).
Provisioning requirements also raised
We have discussed the impact of savings rate deregulation in detail in our note
“deregulation in a competitive market” dated 11th March 2011. RBI has also
hiked provisioning requirements across various categories of NPA. This in our
view negates to a slight extent the respite which the central bank had relaxed
with discontinuing 70% provision coverage incrementally. However under new
guidelines impact on provisioning should be minimal as banks provide more
aggressively as compared to RBI requirements.
Cap on bank investment in MF
Banks investment in debt oriented mutual funds has been capped at 10% of networth
of previous year. This will limit the investments in liquid schemes of MF
to a ceiling of ~Rs 450-500 bn in our view as against average of Rs 600 bn
witnessed in FY11.
Sustained rate rise could impact loan growth
We expect banks to raise lending rates in response to change in policy rates and
rise in savings deposit rate. We believe our base case loan growth expectation of
19% for FY12 could come under pressure from sustained rate hikes. Net profit
for banks in FY12 could fall by 3-6% if growth rates are impacted by high
system rates. Furthermore slower loan growth would bring down margin profile
due to competition and would lead to greater NPL risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Banking & Finance Sector
O peration inflation
Event: RBI hikes policy rates by 50 bps
In its monetary review today RBI has hiked repo rates and reverse repo rates by 50
bps to 7.25% and 6.25% respectively. RBI has also hiked the savings bank deposit
rates by 50 bps to 4%. The central bank has also hiked provisioning requirements
across various categories of NPA and has instilled higher provisions of 2% on
restructured loans.
Impact: Banks may choose to save margins over growth in the near term
In the absence of lending rate hikes, a 50 bps increase in SBA rate would reduce
earnings for PSU banks by 5-7% and for private banks by 1-4%. However, we
expect banks to raise lending rate to protect near term margins, which in turn
would slow loan growth in FY12/13. New provisioning requirements on NPL and
restructured loan would partly offset the benefit of relaxation announced by RBI
last week. (Please refer our note dated 27th Jan’11 “Entering the second stage of
tightening”)
Action: Remain cautious on the sector
We remain cautious second stage of tightening is negative for banks’ profitability
and share price performance due to implication on growth/NIMs. Our base case
estimate of lower credit costs could be at risk if growth slows materially in FY12.
We prefer ICICIBC, Federal, Indus Ind
We would turn bullish if inflation (or crude) declines or stocks correct to historical
average levels (say 8-10% from current levels).
Provisioning requirements also raised
We have discussed the impact of savings rate deregulation in detail in our note
“deregulation in a competitive market” dated 11th March 2011. RBI has also
hiked provisioning requirements across various categories of NPA. This in our
view negates to a slight extent the respite which the central bank had relaxed
with discontinuing 70% provision coverage incrementally. However under new
guidelines impact on provisioning should be minimal as banks provide more
aggressively as compared to RBI requirements.
Cap on bank investment in MF
Banks investment in debt oriented mutual funds has been capped at 10% of networth
of previous year. This will limit the investments in liquid schemes of MF
to a ceiling of ~Rs 450-500 bn in our view as against average of Rs 600 bn
witnessed in FY11.
Sustained rate rise could impact loan growth
We expect banks to raise lending rates in response to change in policy rates and
rise in savings deposit rate. We believe our base case loan growth expectation of
19% for FY12 could come under pressure from sustained rate hikes. Net profit
for banks in FY12 could fall by 3-6% if growth rates are impacted by high
system rates. Furthermore slower loan growth would bring down margin profile
due to competition and would lead to greater NPL risks.
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