India Financials RBI policy: The going gets tougher:: Macquarie Research,

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India Financials
RBI policy: The going gets tougher
Event
RBI today deregulated savings rates & increased benchmark rates by 25bps.
Impact
Savings rate de-regulation – the game changer? The savings deposit rate deregulation
in the interim is bound to result in some irrational competition in the
market in our view and rates could inch up. However we believe a lot depends on
how SBI, which has 25% market share in the savings deposits market, reacts to
the situation. Any increase in rates by SBI could result in competition in markets
and push the system rates upwards. Banks have limited ability to fully pass on
costs to customers in our view. PSU banks led by SBI and PNB get impacted the
most and among private banks HDFC Bank, ICICI and Axis Bank all have a more
or less similar impact based on the SA proportion. Assuming savings rates were to
go up by 100bps the EPS impact could be ~12-13% for PSU banks and ~7-8% for
private sector banks. Least impacted is YES Bank and Kotak Mahindra Bank.
Some other developments:
 Branch licensing norms a bit more relaxed now – positive: RBI has
allowed banks more leeway in opening branches in Tier-2 cities. Banks no
longer need to seek permission from RBI for opening branches in Tier-2 cities.
 Basel- III – from 1st January 2013 in a phased manner: RBI has said that it
is likely to come out with a Basel-III related framework for maintaining capital
and is likely to provide a phase-out period. The guidelines are expected in Dec-
2011. RBI has said that transition to Basel-III is expected to be smooth but
“capital planning would be required in view of substantially higher equity
requirement in capital”. Roughly the difference between reported tier-I and core
tier-I of banks in India is around 100bps in our view. That could be phased out
along with higher counter cyclical buffers to be provided. The current minimum
Tier-I capital required is just 6%.
 Re-defining priority sector – implications for banks as well as NBFCs: RBI
is likely to review the priority sector definition in detail and could alter it. A
committee has already been appointed and a revised clarification and definition
of priority sectors is likely by end of Jan-2012. Any stringent definitions and
exclusion of sectors is likely to affect the NBFC sector more in our view.
 Restructuring of advances – Will be re-looking at it: RBI does admit that
internationally restructuring norms are more conservative and they are treated
as impaired accounts, unlike in India where there have been relaxations
given. Hence it is likely to review restructuring accounting and standards.
Timeline is not specified.
 And finally on new bank licences - cut down the unwanted exuberance
for the time being: Very clearly the regulator has said that only after
legislative amendments (voting rights alignment, giving RBI supreme authority
to supersede the board etc), they will consider issuing new guidelines.
Legislative amendments historically have happened with significant delays.
Outlook
We maintain our bearish stance on the sector.