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India Equity Research Reports, IPO and Stock News
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A troika of new regulations, namely: 1) savings rate deregulation; 2) new banks' entry; and 3)
stricter priority sector norms, point to challenging times for the smaller Indian banks. However,
with an inherent structural opportunity and niche business models, we initiate coverage on YES
(Buy) and IndusInd (Hold).
Savings rate deregulation: much ado about nothing
In the event of the RBI deregulating the savings deposits interest rate (currently fixed at 4.0% pa),
we think a material shift in savings deposits market share is unlikely as long as the large banks
do not participate in a price war (similar to SBI’s ‘teaser’ rate mortgage scheme). We think the
savings deposits franchises of the incumbents are built on the back of difficult to erode sources of
competitive advantage – an entrenched branch infrastructure and superior brand equity. In
addition, even assuming that new entrants are able to increase their share of savings deposits
(and consequently lower their cost of funds) on higher pricing in a rising rate environment, our
analysis indicates that the stronger franchises will actually see a bigger fall in cost of funds vs. the
new entrants as the rate cycle reverses (see pages 7and 8 for details).
New banks imply rising competitive pressure
We think that if larger, better capitalised entities with established retail brand names (read Indian
corporates) are allowed to enter the sector, competition (for deposits, customers, employees) is
likely to intensify (see page 3 for details).
Stricter priority sector lending, branch licensing norms
We think both YES and IndusInd will need to fine-tune their branch expansion targets (both have
guided to a 3x jump to 700-750 branches by 2015) to accommodate: 1) likely stricter ‘direct’
priority sector lending norms; and 2) the RBI’s recent requirement that a quarter of incremental
branches be set up in unbanked areas .
Inherent structural opportunity for niche players
While the regulatory and macroeconomic environment remains challenging, an inherent structural
opportunity and YES, IndusInd’s niche business models makes us believe that the two banks can
weather and grow despite these challenges. We initiate coverage on Yes Bank with a Buy rating
due to a combination of attractive valuations (trading at 2.5x FY12F PB) and a quicker NIM
recovery as interest rates peak. We consider IndusInd a strong structural long-term play amongst
smaller Indian banks. However, what we see as expensive valuations (2.9x FY12F PB) and a
lack of near-term earnings drivers lead us to initiate coverage with a Hold rating. Key risks to our
view are: 1) a sustained flat yield curve; and
2) asset quality risk due to slower growth and the pass-through of higher short-term rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A troika of new regulations, namely: 1) savings rate deregulation; 2) new banks' entry; and 3)
stricter priority sector norms, point to challenging times for the smaller Indian banks. However,
with an inherent structural opportunity and niche business models, we initiate coverage on YES
(Buy) and IndusInd (Hold).
Savings rate deregulation: much ado about nothing
In the event of the RBI deregulating the savings deposits interest rate (currently fixed at 4.0% pa),
we think a material shift in savings deposits market share is unlikely as long as the large banks
do not participate in a price war (similar to SBI’s ‘teaser’ rate mortgage scheme). We think the
savings deposits franchises of the incumbents are built on the back of difficult to erode sources of
competitive advantage – an entrenched branch infrastructure and superior brand equity. In
addition, even assuming that new entrants are able to increase their share of savings deposits
(and consequently lower their cost of funds) on higher pricing in a rising rate environment, our
analysis indicates that the stronger franchises will actually see a bigger fall in cost of funds vs. the
new entrants as the rate cycle reverses (see pages 7and 8 for details).
New banks imply rising competitive pressure
We think that if larger, better capitalised entities with established retail brand names (read Indian
corporates) are allowed to enter the sector, competition (for deposits, customers, employees) is
likely to intensify (see page 3 for details).
Stricter priority sector lending, branch licensing norms
We think both YES and IndusInd will need to fine-tune their branch expansion targets (both have
guided to a 3x jump to 700-750 branches by 2015) to accommodate: 1) likely stricter ‘direct’
priority sector lending norms; and 2) the RBI’s recent requirement that a quarter of incremental
branches be set up in unbanked areas .
Inherent structural opportunity for niche players
While the regulatory and macroeconomic environment remains challenging, an inherent structural
opportunity and YES, IndusInd’s niche business models makes us believe that the two banks can
weather and grow despite these challenges. We initiate coverage on Yes Bank with a Buy rating
due to a combination of attractive valuations (trading at 2.5x FY12F PB) and a quicker NIM
recovery as interest rates peak. We consider IndusInd a strong structural long-term play amongst
smaller Indian banks. However, what we see as expensive valuations (2.9x FY12F PB) and a
lack of near-term earnings drivers lead us to initiate coverage with a Hold rating. Key risks to our
view are: 1) a sustained flat yield curve; and
2) asset quality risk due to slower growth and the pass-through of higher short-term rates.
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