Banks: Key drivers in 2011- ENAM: India Strategy

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Banks: Key drivers in 2011
�� Interest rates & Liquidity: Majority of the tightening absorbed so far (~300 bps) by RBI in CY10, and the severely
tight liquidity situation at year end is not likely to improve in the near term. Going forward, we expect front-loaded
data-driven tightening of ~50 bps (i.e., fuel price hikes, sudden spikes in WPI) along with some liquidity
management actions, with CRR likely to be a preferred policy tool. We believe that the impact of rate hike is
primarily going to be felt on treasury gains and investment portfolios vs on operating metrics

�� Credit growth: Banks generally tend to benefit in a rising GDP growth scenario. Moreover, they have already
benefited from the early up-move in interest rates so far. Credit growth has crossed the RBI target of 20% but
remains skewed and is dominated by large ticket size infra loans. While there are concerns that credit growth could
slacken in a fanatic regulatory environment, we believe that such growth is unlikely to be impaired in a high
economic growth scenario. Hence, we expect 20-22% credit growth in FY12
�� Deposits: Deposit growth (~15%) has lagged so far but is targeted to grow at 18% driven by an increase in deposit
rates – already visible with demand for large corporate deposits making a strong comeback and a steep increase in
term deposit rates. With most of the re-pricing benefits behind us, we expect the coming quarters to witness an
overall rise in cost of funds. The ability to pass on any rate hike is likely to be limited due to intense competition and
credit demand still being skewed. We expect 15-20 bps impact on NIMs as short-term deposit rates mount
aggressively and regulatory pressure builds up to reduce margins


􀂙 Pension liability: Pension liability to be a big overhang for PSU banks and old private sector banks. Reportedly, the
total estimated liability of second option pension is ~Rs 210 bn which is over ~8% of FY10 PSU Banks’ net worth.
RBI has sought ICAI’s nod to allow amortization up to March 2013
􀂙 Asset Quality: The recent negative news flow emanating from various sectors such as micro-finance, telecom (2G),
real estate and diamond loans, along with corporate governance issues, have heightened fears that NPAs could
become a big challenge for Indian banks. The 70% NPA provisioning coverage norm will make their profits
susceptible to volatility. However, our interaction with banks suggests that they are safeguarded with adequate
amount of security and guarantees. Moreover, the total exposure to the aforementioned sectors is limited with most
forming less than 1% of the sectors’ advance book except real estate