RBI increased interest rates on MSF by 200 bps;
announced sale of Rs. 120 bn of G-Sec under OMO
and capped liquidity under LAF at 1% of NDTL. This
should tighten liquidity and take market interest
rates up. With economic growth refusing to pick up,
higher rates will be negative for banks.
Our In-Line view on the sector was premised on
stabilizing growth and rates…both are at risk now.
Recent data on growth have been negative (for instance
IP decline of 1.6% in May was against consensus
expectations of +1.6%). Continued sluggishness in
growth increases stress on banks by impacting volume
growth and increasing asset quality risk.
Liquidity was holding up fairly well helped by
slower loan growth – This had kept market rates in
check. With inflation coming off, we expected interest
rates to decline, albeit marginally. Hence, while growth
was faltering, some of the pressure was likely to be
abated by lower rates. RBI action focuses on reducing
liquidity and thereby pushing up rates.
Asset quality can continue to surprise negatively –
Our view was that in F14, impaired loan formation will
stay at high levels compared to history but will reduce
vis-à-vis last year’s levels. However, given weakening
macro, we can see more corporates under pressure.
Hence, our assumption of NPL formation of 2.2% of
loans in F14 (3.2% in F13) and 1.9% of restructured
loans (2.9% in F14) has upside risk.
Avoid weak balance sheets – We like strong liability
franchises with good asset quality i.e. HDFC Bank. SOE
banks will continue to hurt and NBFC’s will face higher
funding costs. Our top avoids are SBI, PNB and Axis
��
announced sale of Rs. 120 bn of G-Sec under OMO
and capped liquidity under LAF at 1% of NDTL. This
should tighten liquidity and take market interest
rates up. With economic growth refusing to pick up,
higher rates will be negative for banks.
Our In-Line view on the sector was premised on
stabilizing growth and rates…both are at risk now.
Recent data on growth have been negative (for instance
IP decline of 1.6% in May was against consensus
expectations of +1.6%). Continued sluggishness in
growth increases stress on banks by impacting volume
growth and increasing asset quality risk.
Liquidity was holding up fairly well helped by
slower loan growth – This had kept market rates in
check. With inflation coming off, we expected interest
rates to decline, albeit marginally. Hence, while growth
was faltering, some of the pressure was likely to be
abated by lower rates. RBI action focuses on reducing
liquidity and thereby pushing up rates.
Asset quality can continue to surprise negatively –
Our view was that in F14, impaired loan formation will
stay at high levels compared to history but will reduce
vis-à-vis last year’s levels. However, given weakening
macro, we can see more corporates under pressure.
Hence, our assumption of NPL formation of 2.2% of
loans in F14 (3.2% in F13) and 1.9% of restructured
loans (2.9% in F14) has upside risk.
Avoid weak balance sheets – We like strong liability
franchises with good asset quality i.e. HDFC Bank. SOE
banks will continue to hurt and NBFC’s will face higher
funding costs. Our top avoids are SBI, PNB and Axis
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