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Banks
A few dark clouds
Three-month CD rates have increased about 130bp to 9.8% from near-term lows
in mid-April. The sharp increase is a negative surprise, given that 1Q is generally
a lean period for loan growth. We remain cautiously optimistic on the sector; we
recently upgraded ICICI Bank and Axis Bank to Buy
Short-term wholesale borrowing costs have spiked up again; yield curve flat
Short-term wholesale borrowing costs as reflected by three-month certificate of deposit (CD)
rates have increased about 130bp in the past 45 days, to 9.8% (see Chart 5). The sharp
increase is a negative surprise, given that 1Q is generally a lean period for loan growth. The
gap between the three-month and the one-year CD rates that had expanded in April has now
narrowed. Most of the banks recently increased deposit rates across the shorter-tenure
maturity buckets. The interest rate on three- to six-month deposits is now close to 7.0% (see
Chart 3). The one-year G-sec yield is currently 8.3%, the five-year G-sec yield is about 8.5%
and the 10-year G-sec yield is 8.4%, implying a flat yield curve (see Chart 2). In general, a
sustained flattening of the yield curve will put pressure on net interest margins.
Base rate is now close to 10%; liquidity appears to be tightening
The base lending rate for banks, in general, is now close to 10% (see Chart 1). Loans grew
22.3% yoy and deposit growth was 17.4% yoy as of 20 May 2011 (see Table 1). The sharp
rise in lending rates will likely slow loan growth and the increase in deposit rates will likely
keep deposit growth steady. Liquidity as reflected by repo borrowings appears to be
tightening steadily (see Chart 6). Banks were net borrowers to the tune of about Rs535bn in
May 2011, compared to about Rs43bn average daily borrowing in April 2011.
Interest rates should remain elevated; rainfall remains a key variable
Given the RBI’s stance, we believe interest rates are likely to remain elevated in the medium
term. Two key questions arise at this point: 1) how much will loan growth slow?; and 2) in the
event of a sharp slowdown, what will be the impact on asset quality? The near-term variable
to watch is rainfall, which will have an indirect bearing on business growth and asset quality.
Cautious optimism; we recently upgraded Axis Bank and ICICI Bank to Buy
We remain cautiously optimistic on the sector. In general, asset quality trends look
comfortable to us except in the case of certain public-sector banks, for which gross
delinquency ratios have been higher than peers in FY11 (especially SBI and PNB). We
believe that they may not outperform in the short term. SBI management had recently
reiterated its positive outlook on margins and its focus on improving asset quality. However,
the key trigger for the stock, in our view, will be the earnings actually delivered by SBI over
the coming quarters. We recently upgraded ICICI Bank and Axis Bank to Buy (see our notes
FY11 AR: Some reasons to cheer, dated 30 May, and A few positive points, dated 20 May).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks
A few dark clouds
Three-month CD rates have increased about 130bp to 9.8% from near-term lows
in mid-April. The sharp increase is a negative surprise, given that 1Q is generally
a lean period for loan growth. We remain cautiously optimistic on the sector; we
recently upgraded ICICI Bank and Axis Bank to Buy
Short-term wholesale borrowing costs have spiked up again; yield curve flat
Short-term wholesale borrowing costs as reflected by three-month certificate of deposit (CD)
rates have increased about 130bp in the past 45 days, to 9.8% (see Chart 5). The sharp
increase is a negative surprise, given that 1Q is generally a lean period for loan growth. The
gap between the three-month and the one-year CD rates that had expanded in April has now
narrowed. Most of the banks recently increased deposit rates across the shorter-tenure
maturity buckets. The interest rate on three- to six-month deposits is now close to 7.0% (see
Chart 3). The one-year G-sec yield is currently 8.3%, the five-year G-sec yield is about 8.5%
and the 10-year G-sec yield is 8.4%, implying a flat yield curve (see Chart 2). In general, a
sustained flattening of the yield curve will put pressure on net interest margins.
Base rate is now close to 10%; liquidity appears to be tightening
The base lending rate for banks, in general, is now close to 10% (see Chart 1). Loans grew
22.3% yoy and deposit growth was 17.4% yoy as of 20 May 2011 (see Table 1). The sharp
rise in lending rates will likely slow loan growth and the increase in deposit rates will likely
keep deposit growth steady. Liquidity as reflected by repo borrowings appears to be
tightening steadily (see Chart 6). Banks were net borrowers to the tune of about Rs535bn in
May 2011, compared to about Rs43bn average daily borrowing in April 2011.
Interest rates should remain elevated; rainfall remains a key variable
Given the RBI’s stance, we believe interest rates are likely to remain elevated in the medium
term. Two key questions arise at this point: 1) how much will loan growth slow?; and 2) in the
event of a sharp slowdown, what will be the impact on asset quality? The near-term variable
to watch is rainfall, which will have an indirect bearing on business growth and asset quality.
Cautious optimism; we recently upgraded Axis Bank and ICICI Bank to Buy
We remain cautiously optimistic on the sector. In general, asset quality trends look
comfortable to us except in the case of certain public-sector banks, for which gross
delinquency ratios have been higher than peers in FY11 (especially SBI and PNB). We
believe that they may not outperform in the short term. SBI management had recently
reiterated its positive outlook on margins and its focus on improving asset quality. However,
the key trigger for the stock, in our view, will be the earnings actually delivered by SBI over
the coming quarters. We recently upgraded ICICI Bank and Axis Bank to Buy (see our notes
FY11 AR: Some reasons to cheer, dated 30 May, and A few positive points, dated 20 May).
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