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India Financials
Rate rigidity creeping in – Get choosy
Short and long rates getting stickier at current levels;
government borrowings and inflation both prone to slippage
Likely to impact loan growth, bond profits and asset qualityespecially
for PSU banks
Preferred picks: ICICI Bank (OW), LIC Housing (OW(V)),
HDFC Ltd (OW)
A half-hearted budget announced a lower deficit next year, but doubts remain on its
credibility and how much RBI would cut rates given the added risk of rising inflation. The
market reacted negatively, with the Nifty index falling more than 3% just after the budget
speech ended on 20 March.
The long and short of rates: The fiscal deficit for FY13, although lower than the current
year, remains a question mark at 5.1% given some risks remain to the seemingly
optimistic subsidy numbers and the 2G auction revenues planned. The net borrowing
program is budgeted significantly larger than expected at INR4.8tn and if concentrated in
the first half of FY13, it could lead to long bond yields further rising from current 8.4%
levels. Rising supply side inflation (fuel, freight and power tariffs led) could overflow into
demand-led inflation leading RBI to slow rate cuts at the short end vs the aggressive rate
cuts that the street has already factored in. These factors may sustain into next year’s
‘election’ budget introducing rate rigidity at both the long and short ends. This scenario is
not positive for banks.
Persistently high rates are likely to impact credit growth and quality adversely as they
also impact bond profits particularly for PSU banks. In addition, if policy paralysis
continues, that would be a significant barrier to investment-led credit demand. The
potentially improving liquidity situation April onwards would be one of the few positives
to look forward to. However, it is debatable whether banks would meaningfully cut
lending and deposit rates now, keeping margins broadly flattish into FY13. But asset
quality pressures may sustain for a while longer if lending rates remain sticky leaving
earnings prospects uncertain especially for PSU banks which would also face pressure on
bond profits.
Stock picking strategy: Stock winners, in our opinion would be those that i) remain
cheap relative to their history and relative to peers, ii) have a loan book size or mix that is
resilient to slow system growth, iii) have relatively fewer asset quality issues. Hence, our
preferred picks include ICICI Bank and the housing finance companies (LICHF, HDFC
Ltd). We also rate YES and IIB OW and prefer them for their relatively cheaper PE-based
valuations as earnings potential and visibility are higher.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Financials
Rate rigidity creeping in – Get choosy
Short and long rates getting stickier at current levels;
government borrowings and inflation both prone to slippage
Likely to impact loan growth, bond profits and asset qualityespecially
for PSU banks
Preferred picks: ICICI Bank (OW), LIC Housing (OW(V)),
HDFC Ltd (OW)
A half-hearted budget announced a lower deficit next year, but doubts remain on its
credibility and how much RBI would cut rates given the added risk of rising inflation. The
market reacted negatively, with the Nifty index falling more than 3% just after the budget
speech ended on 20 March.
The long and short of rates: The fiscal deficit for FY13, although lower than the current
year, remains a question mark at 5.1% given some risks remain to the seemingly
optimistic subsidy numbers and the 2G auction revenues planned. The net borrowing
program is budgeted significantly larger than expected at INR4.8tn and if concentrated in
the first half of FY13, it could lead to long bond yields further rising from current 8.4%
levels. Rising supply side inflation (fuel, freight and power tariffs led) could overflow into
demand-led inflation leading RBI to slow rate cuts at the short end vs the aggressive rate
cuts that the street has already factored in. These factors may sustain into next year’s
‘election’ budget introducing rate rigidity at both the long and short ends. This scenario is
not positive for banks.
Persistently high rates are likely to impact credit growth and quality adversely as they
also impact bond profits particularly for PSU banks. In addition, if policy paralysis
continues, that would be a significant barrier to investment-led credit demand. The
potentially improving liquidity situation April onwards would be one of the few positives
to look forward to. However, it is debatable whether banks would meaningfully cut
lending and deposit rates now, keeping margins broadly flattish into FY13. But asset
quality pressures may sustain for a while longer if lending rates remain sticky leaving
earnings prospects uncertain especially for PSU banks which would also face pressure on
bond profits.
Stock picking strategy: Stock winners, in our opinion would be those that i) remain
cheap relative to their history and relative to peers, ii) have a loan book size or mix that is
resilient to slow system growth, iii) have relatively fewer asset quality issues. Hence, our
preferred picks include ICICI Bank and the housing finance companies (LICHF, HDFC
Ltd). We also rate YES and IIB OW and prefer them for their relatively cheaper PE-based
valuations as earnings potential and visibility are higher.
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