■ RBI in an attempt to protect the INR announces a reversal in its easy
money stance. In a surprise move, RBI has announced a 200 bp hike in bank
rate to 10.25%, sucking out Rs120 bn of liquidity through OMOs. It has capped
banks’ borrowing under the LAF (repo window at 7.25%) to Rs750 bn, and for
any incremental liquidity, banks will have to source funding at the now elevated
bank rate of 10.25%. The measures are aimed at drying up excess INR liquidity
in an attempt to reverse the slide in the currency.
■ Banks’ asset growth had outpaced deposit growth. Comforted by the
Central Bank’s easy money stance, Indian banks’ loan growth was consistently
running ahead of deposit growth for the past three years. Loan deposit ratios
were therefore consistently rising; at 76%, LDRs are close to historic high (India
has 27% reserve ratio). ALM mismatches at some of the banks had also
aggravated over the past few years, as loan book tenures had been rising.
■ Downgrade high valuation, wholesale funded banks. These wholesalefunded entities (Yes, Kotak, BOI, Canara and the NBFCs), banks with high
LDRs (IndusInd, Yes) and those with ALM mismatches will be the worst
impacted with these moves, as they will be forced to curb asset growth in
addition to facing margin pressures. Indian banks’ valuations till now were
primarily determined by asset side comfort. With the liability part of the balance
sheet also coming into focus, we see downside to stocks of wholesale funded
retail lenders like Kotak (95% LDR) and IndusInd (82%) trading at ~3x book,
and we downgrade these two to UNDERPERFORM from Neutral (Lower TPs
to Rs618 from Rs680 and to Rs416 from Rs465, respectively). The biggest risk
from this set of measures would be if the lack of liquidity precipitates the
corporate asset quality problems. As liquidity becomes scarce, some of these
assets may turn to NPLs on books quicker than expected earlier. We maintain
our UNDERWEIGHT stance on the Indian banks sector
��
money stance. In a surprise move, RBI has announced a 200 bp hike in bank
rate to 10.25%, sucking out Rs120 bn of liquidity through OMOs. It has capped
banks’ borrowing under the LAF (repo window at 7.25%) to Rs750 bn, and for
any incremental liquidity, banks will have to source funding at the now elevated
bank rate of 10.25%. The measures are aimed at drying up excess INR liquidity
in an attempt to reverse the slide in the currency.
■ Banks’ asset growth had outpaced deposit growth. Comforted by the
Central Bank’s easy money stance, Indian banks’ loan growth was consistently
running ahead of deposit growth for the past three years. Loan deposit ratios
were therefore consistently rising; at 76%, LDRs are close to historic high (India
has 27% reserve ratio). ALM mismatches at some of the banks had also
aggravated over the past few years, as loan book tenures had been rising.
■ Downgrade high valuation, wholesale funded banks. These wholesalefunded entities (Yes, Kotak, BOI, Canara and the NBFCs), banks with high
LDRs (IndusInd, Yes) and those with ALM mismatches will be the worst
impacted with these moves, as they will be forced to curb asset growth in
addition to facing margin pressures. Indian banks’ valuations till now were
primarily determined by asset side comfort. With the liability part of the balance
sheet also coming into focus, we see downside to stocks of wholesale funded
retail lenders like Kotak (95% LDR) and IndusInd (82%) trading at ~3x book,
and we downgrade these two to UNDERPERFORM from Neutral (Lower TPs
to Rs618 from Rs680 and to Rs416 from Rs465, respectively). The biggest risk
from this set of measures would be if the lack of liquidity precipitates the
corporate asset quality problems. As liquidity becomes scarce, some of these
assets may turn to NPLs on books quicker than expected earlier. We maintain
our UNDERWEIGHT stance on the Indian banks sector
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