Banking - CRR cut: Predicted move, unpredicted timing and magnitude; Edelweiss PDF link

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In not a totally unexpected move, RBI has unleashed its liquidity injection measures by cutting CRR by 75 bps (consensus expectation: 50 bps) effective 10^th March (consensus expectation on the 16^th March).

Impact

·       Liquidity relief: After remaining persistently above the comfort level (1% of NDTL) for a period of time, RBI action should soothe nerves in the wholesale market which was getting jittery about the liquidity deficit and the expectation, given the advance tax outflows. Short term rates which had inched up by about 100-125bps from Jan 12, touching 11% +, should retrace back to average levels.

·       Coupled with a 50bps cut in the Jan policy, the current 75bps cut should improve bank margins by about 10-12bps – assuming the diversion of released funds to interest yielding assets.

·       Banks may use the cushion to lower base rates (with a 10bps cushion on margins, banks have a leeway to cut base rate by about 15bps) and give impetus to the sagging credit growth.

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·       We expect current measures to be more beneficial for wholesale funded banks as it would restrict the increase in cost of funds. Also given that the benefit of margins is similar across banks, impact would be higher for banks with a weak margin profile. We, therefore, recommend Yes Bank and OBC to play this event. Amongst NBFCs, we prefer companies with more short term borrowing profile or where NIMs have been under significant pressure in 9MFY12. We prefer LIC Housing Finance amongst NBFCs to play the easing of wholesale rates.

·       Given the backdrop of macro headwinds – essentially asset quality, we continue to prefer private sector banks – Axis Bank, ICICI Bank and Federal Bank. Reiterate ‘REDUCE’ on PNB.

·       Our economy team believes that chances of a repo rate cut are less given the evolving situation of inflation (read elevated crude prices).

·       We believe more decisive lending rate cuts by banks would be visible only in the backdrop of repo rate cuts.

Banking - CRR cut: Predicted move, unpredicted timing and magnitude; sector update

Regards,