Banks – Easing pressures ::RBS

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Liquidity appears to have improved over the past couple of weeks. Partly on the back of this,
short-term three-month wholesale borrowing costs – ie certificate of deposit rates – have
slipped. Prior to 1Q earnings releases, we prefer PFC and Bank of Baroda. Axis Bank could
disappoint on earnings growth in 1Q.


Loan growth moderating; liquidity appears to have improved
As of 2 July 2011, total loans were up 19.9% yoy (21.4% in FY11) and deposits were up
18.4% yoy (15.8% in FY11). Within the last fortnight, absolute deposit growth was
Rs1,440bn, while loans grew Rs847bn. In 1QFY12 (April to June), the loan-to-deposit ratio
on an incremental basis was about 52% (see Table 1). Liquidity, reflected by the repo
balance, appears to have improved within the past couple of weeks. Banks have been net
borrowers from the Reserve Bank of India (RBI) to the tune of a daily average of about
Rs204bn in July to date, vs about Rs478bn during 1QFY12 (April to June, see Chart 1).
In general, most banks raise deposit rates and lending rates
In a surprise move, State Bank of India (SBI) raised the prime lending rate and base rate
25bp each to 14.25% and 9.50%, respectively, effective 11 July. SBI’s cumulative increase in
the lending rate is about 190bp since December 2010. The base rate for lending across most
banks is now close to 10.0% (see Chart 4). Furthermore, SBI increased retail term deposit
rates to 7.0% for deposits up to 90 days and 9.25% for deposits exceeding one year (see
Chart 3). Most banks have raised deposit rates and lending rates in the past week.
Wholesale borrowing costs for one year remain elevated, but three-months slip
In general, loan growth is lean in the 1H. Partly on the back of this and improving liquidity,
the short-term wholesale borrowing cost has eased. Three-month certificate of deposit rates
(a reflection of wholesale borrowing costs) have slipped to 8.7% from a recent peak of 9.5%
in mid-June. However, one-year CD rates have remained largely stable within the range of
9.8-9.9%


Prior to 1Q earnings release, we prefer PFC and BoB; Axis could disappoint
At 1.2x FY12F book value, based on our forecasts, we believe PFC is attractive, despite our
concerns about the financial health of state electricity boards (SEBs) and headwinds for the
power sector. Prior to 1QFY12 results, we like Bank of Baroda (1.5x FY12F adjusted book value)
among public sector banks. Among private sector banks, we believe Axis Bank (2.5x FY12F
adjusted BV) may likely see a moderation in core earnings growth driven largely by margin
compression.