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Trend reversal
We expect the gap between credit and deposit growth to reverse in FY12 with
deposit growth (21%) outpacing credit growth (18%). Margins will compress
in next 2-3 quarters and pressure would be more for banks with lower CASA
ratio, higher share of wholesale deposits and banks with sizable ALM
mismatch as on Mar-11. We see risk of +50bps fall in spreads; but margins
will start expanding in 2HFY12 as in phase 3 of the cycle, banks focus more on
NIM v/s growth. Moderation in credit growth and pick-up in deposit growth
will lower incremental LDR and ease liquidity. This could drive correction in
short term rates and make yield curve bit steeper. As loan demand softens,
banks with high CASA ratio should gain market share. Over FY12-13, 100bps
lower than expected credit growth would impact earnings by 1-3%.
Deposit growth will outpace credit demand
q In FY11, credit growth of 21% was slightly higher than RBI’s projection of 20%
and deposit growth of <16% was below projection of 17%. However, the
500bps gap between credit and deposit growth was highest in 5 years.
q In FY12 we expect this trend to reverse as we see pressure on credit demand
and tailwinds for pick-up in deposit growth.
q Credit demand may weaken due to (1) lower demand for working capital
financing– following correction in commodity prices (2) slowdown in infra and
capex loans and (3) lower retail credit demand.
q On other hand, deposit inflows may trend-up due to (1) hike in rates (2) rise in
share of bank deposits within household savings (sale of insurance and mutual
funds have slowed) and (3) faster compounding of deposits.
q We expect credit growth in FY12 to be 18% (lower than RBI’s projection of
19%) and deposit growth to be 21% (higher than RBI projection of 17%).
q Our analysis of interest rate cycles over the past eight years also indicates
towards moderation in credit growth and pick-up in deposit growth.
Liquidity will improve, yield curve to become steeper
q While the banks continue to borrow from RBI (reverse repo at Rs1tn), we
believe this could decline as advance tax collections flow back.
q Rates on certificate of deposits have corrected by 30-100bps and may contract
further with improvement in liquidity.
q While we expect some hike in lending rates, retail term deposit rates could
remain relatively stable at current levels.
q The yield curve should become a bit steeper with correction in short term rates
and some upward pressure at the long-end.
Risk of +50bps contraction in spreads, but new loans are NIM accretive
q Over the next 2-3 quarters we expect spreads to be under pressure as the hike
in deposit rates has been more than that for loans.
q Banks with higher share of wholesale deposits and mismatch in maturity profile
will see greater pressure- resulting in +50bps contraction in NIMs (offset to
some extent by capital infusion); smaller PSU banks are more vulnerable.
q We expect margins to expand in 2HFY12 as recent hike in loan rates have been
more than hike in deposit rates and quicker than in previous cycle.
High CASA banks would gain market share as loan growth moderate
q Every 100bps lower loan growth can impact earnings by 1-3% over FY12-13.
q As loan demand slows, banks with high CASA ratio and hence lower cost of
funding can gain market share. As a result, the gap between credit growth of
high CASA banks and the sector can widen.
q While banks are not yet worried about asset quality pressures, we believe that
banks with lower share of risky exposures will continue to outperform.
q HDFC Bank and ICICI Bank stay as our top picks.
q Improvement in liquidity can lead to some bounce-back in low CASA banks and
NBFCs like HDFC, IDFC, PFC and REC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Trend reversal
We expect the gap between credit and deposit growth to reverse in FY12 with
deposit growth (21%) outpacing credit growth (18%). Margins will compress
in next 2-3 quarters and pressure would be more for banks with lower CASA
ratio, higher share of wholesale deposits and banks with sizable ALM
mismatch as on Mar-11. We see risk of +50bps fall in spreads; but margins
will start expanding in 2HFY12 as in phase 3 of the cycle, banks focus more on
NIM v/s growth. Moderation in credit growth and pick-up in deposit growth
will lower incremental LDR and ease liquidity. This could drive correction in
short term rates and make yield curve bit steeper. As loan demand softens,
banks with high CASA ratio should gain market share. Over FY12-13, 100bps
lower than expected credit growth would impact earnings by 1-3%.
Deposit growth will outpace credit demand
q In FY11, credit growth of 21% was slightly higher than RBI’s projection of 20%
and deposit growth of <16% was below projection of 17%. However, the
500bps gap between credit and deposit growth was highest in 5 years.
q In FY12 we expect this trend to reverse as we see pressure on credit demand
and tailwinds for pick-up in deposit growth.
q Credit demand may weaken due to (1) lower demand for working capital
financing– following correction in commodity prices (2) slowdown in infra and
capex loans and (3) lower retail credit demand.
q On other hand, deposit inflows may trend-up due to (1) hike in rates (2) rise in
share of bank deposits within household savings (sale of insurance and mutual
funds have slowed) and (3) faster compounding of deposits.
q We expect credit growth in FY12 to be 18% (lower than RBI’s projection of
19%) and deposit growth to be 21% (higher than RBI projection of 17%).
q Our analysis of interest rate cycles over the past eight years also indicates
towards moderation in credit growth and pick-up in deposit growth.
Liquidity will improve, yield curve to become steeper
q While the banks continue to borrow from RBI (reverse repo at Rs1tn), we
believe this could decline as advance tax collections flow back.
q Rates on certificate of deposits have corrected by 30-100bps and may contract
further with improvement in liquidity.
q While we expect some hike in lending rates, retail term deposit rates could
remain relatively stable at current levels.
q The yield curve should become a bit steeper with correction in short term rates
and some upward pressure at the long-end.
Risk of +50bps contraction in spreads, but new loans are NIM accretive
q Over the next 2-3 quarters we expect spreads to be under pressure as the hike
in deposit rates has been more than that for loans.
q Banks with higher share of wholesale deposits and mismatch in maturity profile
will see greater pressure- resulting in +50bps contraction in NIMs (offset to
some extent by capital infusion); smaller PSU banks are more vulnerable.
q We expect margins to expand in 2HFY12 as recent hike in loan rates have been
more than hike in deposit rates and quicker than in previous cycle.
High CASA banks would gain market share as loan growth moderate
q Every 100bps lower loan growth can impact earnings by 1-3% over FY12-13.
q As loan demand slows, banks with high CASA ratio and hence lower cost of
funding can gain market share. As a result, the gap between credit growth of
high CASA banks and the sector can widen.
q While banks are not yet worried about asset quality pressures, we believe that
banks with lower share of risky exposures will continue to outperform.
q HDFC Bank and ICICI Bank stay as our top picks.
q Improvement in liquidity can lead to some bounce-back in low CASA banks and
NBFCs like HDFC, IDFC, PFC and REC.
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