India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
n Fresh round of deposit rate hike
Signaling that pressure on liquidity could continue for some time, on December 7, 2010, the State Bank of India (SBI) initiated a steep, unexpected 100bps increase in the relevant one-two year deposit bucket. At 8.5% for a 555 day deposit, the rate offered by the bank was higher than peers. In response, other banks also raised their rates. However, the hikes by the latter came in tandem with increase in lending rates, reflecting the pricing power wielded by banks and their consciousness towards margin protection. However, in less than a month, re-sounding the liquidity pressure persisting in the system (a function of slow deposit growth), SBI raised its deposit rate again in the one-two year bucket by 50bps to 9%, a notch above peers. With the leader setting the tone, we expect others to follow. SBI’s rate hike was coupled with 40bps increase in the base rate and 25bps hike in PLR, reflecting the pricing power wielded by banks. Since the beginning of FY11, the banking system has seen a cumulative rise of ~190bps in deposit rates, 120bps in PLR, and 75bps in the base rate.
n Relief from extreme conditions, but tightness to remain
Banking system has experienced marginal relief from extreme conditions as reflected in net repo outstanding coming to negative of INR 1.1tn from a high of INR 1.6tn. In the mid quarter policy review (mid-December 2010), the RBI announced liquidity enhancing measures— OMO of INR 480 bn over the next month and SLR cut from 25% to 24%—to address the persistent shortfall in domestic liquidity. Despite the central bank action, we expect liquidity to remain tight (in INR 800-1,100 bn range) till the second week of February; post mid-February, with end of the government borrowing programme for FY11, we expect liquidity conditions to improve as government spending picks up coupled with shift of money in circulation to the banking system due to higher deposit rates on offer.
n Margin headwinds
Given the tight liquidity and slow deposit mobilisation (7% YTD deposit growth against 12% YTD credit growth), we believe: (a) cost pressures will be more prevalent and the impact will be disproportionate across banks, impacting relatively weaker franchisees more; (b) with strong pricing power demonstrated by the banking system as credit growth picks up amidst tight liquidity, we expect lending spreads to remain stable; (c) hit on investment spreads to adversely impact NIMs, more so, with the LDR touching high (75%), leaving limited scope for benefit flowing from asset re-allocation. We believe, smaller PSBs will be impacted more than large PSBs/private banks with strong liability franchise.
n Outlook: Move to safer havens
From the perspective of margin protection, we like strong liability franchises—HDFC Bank, ICICI Bank, SBI, and Punjab National Bank. Overall, given the macro-headwinds, we reiterate our view (refer our report Banking: Move to safer heavens, dated Nov 26, 2010) recommending investors to skew their positions more towards safer havens. Our pecking order suggests a move towards quality bets where valuation comfort is high:
1. High quality private banks: HDFC Bank, ICICI Bank,
2. Mid cap private banks: Yes Bank, Federal Bank,
3. Large cap PSU banks: Bank of Baroda, Union Bank,
4. Avoid mid cap PSU banks.
No comments:
Post a Comment