Regulatory dynamics: The strong to emerge stronger:: Motilal Oswal

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Regulatory dynamics: The strong to emerge stronger
Balance sheets will strengthen; P&L may hurt during transition
Over the last 12 months, the regulators (RBI and NHB) have tightened their grip on
the Indian financial sector through a spate of regulations. We enumerate some of
the key game changing regulations proposed/issued by the RBI/NHB:
1) Final guidelines on Basel III norms
2) Discussion paper on dynamic provisioning framework
3) De-regulation of savings deposit rate
4) Final guidelines on securitization
5) Multiple regulations for gold financiers
6) Removal of prepayment penalty and uniform rates for old and new customers
for housing loans, and
7) Separate regulatory framework for microfinance institutions (MFIs).
Major impact on key segments
 Banks: Earnings volatility to reduce but near-term return ratios may be impacted.
Profitability of mid-cap PSU banks is at higher risk; private banks would be better
placed due to higher capital buffer and strong risk management practices.
 Housing finance companies likely to remain largely unscathed due to their niche
focus, robust risk management practices, and cash flow based lending.
 Gold financiers may have to reinvent business models; growth and return ratios
to decline
 Micro finance Institutions will continue to grow at a slower pace as they transit
into the new regulatory environment.
Sector view and strategy: Expect medium-term RoEs to come under pressure due to
(a) higher capital requirement, and (b) stringent provisioning and asset recognition
norms. Prefer market leaders with strong management and liability franchise, and
superior technology. Top picks: SBIN, PNB, ICICIBC (large cap banks), YES, OBC (mid
cap banks), and HDFC, IDFC (NBFCs).