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India Equity Research Reports, IPO and Stock News
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Repo rate hike – Likely to be the last in the current cycle
The Reserve Bank of India (RBI), in its second quarter review of the monetary policy,
persevered with its anti-inflationary stance and raised repo rate by 25bp to 8.5%.
The Central Bank maintained status quo on CRR and SLR at 6.0% and 24.0%,
respectively. The policy action was in-line with ours and street’s expectations. However,
importantly, this policy also carried guidance to the effect that in light of the expected
inflation and growth trajectory in the coming months, the probability of further rate
hikes by the RBI is quite low. We have also held the view that policy rates are close to
peak levels; but with this policy, the RBI has increased the certainty that interest rates
have now peaked. In our view, the actual decline in policy rates is unlikely until the RBI
becomes quite confident that inflationary expectations are well anchored. In any case,
term deposit rates are unlikely to go up from current levels, although banks may likely
wait till the end of the busy season and a material decline in FD rates may happen from
April 2012.
In our view, this signaling of the peaking of policy rates removes a key overhang on the
outlook for FY2013 Sensex earnings, provided incrementally inflationary pressures do
not re-emerge. The likelihood of the latter happening also looks slim, considering that
global commodity prices are also cooling off as evidenced in the decline in the CRB
Index. The recent trend in the movement of the Reuters CRB Index suggests moderation
in headline WPI inflation from December 2011. Over the past five years, there has been
~90% positive correlation between the yoy change in monthly average of the Reuters
CRB Index and headline WPI inflation numbers with a three-month lag. The yoy rise in
Reuters CRB Index has halved from 32.0% in June 2011 (which has reflected in WPI
inflation numbers for September 2011) to just 4.3% during October 2011 MTD
(expected to reflect in domestic inflation numbers from January 2012). Also, the impact
of the previous monetary tightening is yet to flow through fully, in our view. Hence, we
expect headline inflation to start moderating from December 2011 onwards.
Savings rate deregulation
Impact on retail deposit market share: In our view, high savings account balances
(and their proportion in the total deposit base) are indicative of a larger retail
customer base for any bank. In our view, the advantage of having a higher
proportion of retail funding will remain, irrespective of savings rate deregulation.
The deregulation will provide an additional tool for newer private banks (small as
well as large) to acquire customers by more targeted customer segmentation and
product attributes. Also, like in the case of FDs, smaller banks are likely to offer
50-100bp higher rates to try to attract customers. That said, in our view, public
trust and a wider network reach will remain the key factors in maintaining/gaining
retail customer market share and, hence, we would not expect any material
change in market share dynamics due to savings rate deregulation.
Longer-term impact on profitability: In our view, the advantage of savings accounts
being low-cost deposits will remain, irrespective of savings rate deregulation.
However, the advantage of savings accounts being fixed rate deposits will clearly
vanish – and this, we believe, is the key negative impact of savings rate
deregulation. In the context of the Indian banking system, the negative impact of
compulsory SLR investments, which are at a fixed coupon rate, was managed by
banks by virtue of corresponding fixed rate CASA deposits on the liability side.
Hence, in a rising interest rate environment, there was some extent of matching in
terms of interest re-pricing buckets by having fixed rate SLR investments countered
by fixed rate CASA. This advantage was clearly more so in case of high savings
banks – which will now erode. We have accordingly recalibrated our target
multiples to an extent, as we believe that the premium commanded by the larger,
high savings banks (HDFC Bank amongst private banks and SBI and PNB amongst
PSU banks) will marginally erode. While, at the other end of the spectrum, the
disadvantage of having relatively lesser share of low-cost funding will reduce to an
extent for low savings banks (such as Yes Bank).
Immediate impact on profitability: Since, the savings rate has been deregulated at
what we view as the peak of the interest rate cycle, wherein the gap between FD
rates and savings rate is at its widest, the above-mentioned impact of deregulation
on profitability is likely to be immediately felt in the next two quarters itself on
near-term earnings as well. In our view, to the extent that there is some scope for
the average cost of savings accounts to increase, we believe the average impact on
the overall banking sector would get passed on to customers. As per our
calculations, a 1% increase in savings rate would have a 20bp impact on the total
cost of funds for the sector as a whole and is likely to get passed on to a large
extent in the form of lending rate hikes and/or a cut in FD rates. We have assumed
75% of the incremental costs to be passed on to customers in our scenario
analysis. Evidently, for banks with a higher proportion of savings account
balances, the impact on total cost of funds will be higher and, in our view, this
incremental impact could be reflected in NIM compression in the near-term itself.
As per our scenario analysis, the highest percentage impact on PBT in case of
larger banks would be for banks such as SBI, PNB and Union Bank of India from
the PSU space and HDFC Bank from the private banking universe; and in case of
smaller banks, it would be for United Bank of India, Bank of Maharashtra, Central
Bank of India and Dena Bank. While the PBT impact for some of the PSU banks
appears the highest, at the same time most of their savings accounts balances are
from the rural hinterland where the concerned banks have minimal competition
and which in the near-term could shield the impact on their cost of funds from this
development.
As a corollary impact of the savings deregulation, we believe it will become all the
more unattractive for banks to hold any excess SLR and, hence, we maintain an
upward bias on government bond yields, which is likely to be exacerbated by this
development. This will increase the negative earnings impact on banks with a
higher proportion of high-duration SLR holdings in the AFS segment.
We have recalibrated our target P/ABV multiples for this change in regulation and
will look to revise earnings estimates depending on the actual changes in rates in
the coming weeks. In our view, among banks that are expected to gain the most
from this move will be new-age banks such as Yes Bank. These banks will also
gain from further liberalization of branch-licensing norms, in terms of not requiring
RBI approval for opening branches in Tier 2 to Tier 6 centers. We maintain our Buy
recommendation on Yes Bank with a target price of `347, implying an upside of
23.4% from current levels. Amongst the PSU banks, the banks that stand to benefit
the most include Corporation Bank on which we maintain our Buy rating with a
target price of `489, implying an upside of 20.8%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Repo rate hike – Likely to be the last in the current cycle
The Reserve Bank of India (RBI), in its second quarter review of the monetary policy,
persevered with its anti-inflationary stance and raised repo rate by 25bp to 8.5%.
The Central Bank maintained status quo on CRR and SLR at 6.0% and 24.0%,
respectively. The policy action was in-line with ours and street’s expectations. However,
importantly, this policy also carried guidance to the effect that in light of the expected
inflation and growth trajectory in the coming months, the probability of further rate
hikes by the RBI is quite low. We have also held the view that policy rates are close to
peak levels; but with this policy, the RBI has increased the certainty that interest rates
have now peaked. In our view, the actual decline in policy rates is unlikely until the RBI
becomes quite confident that inflationary expectations are well anchored. In any case,
term deposit rates are unlikely to go up from current levels, although banks may likely
wait till the end of the busy season and a material decline in FD rates may happen from
April 2012.
In our view, this signaling of the peaking of policy rates removes a key overhang on the
outlook for FY2013 Sensex earnings, provided incrementally inflationary pressures do
not re-emerge. The likelihood of the latter happening also looks slim, considering that
global commodity prices are also cooling off as evidenced in the decline in the CRB
Index. The recent trend in the movement of the Reuters CRB Index suggests moderation
in headline WPI inflation from December 2011. Over the past five years, there has been
~90% positive correlation between the yoy change in monthly average of the Reuters
CRB Index and headline WPI inflation numbers with a three-month lag. The yoy rise in
Reuters CRB Index has halved from 32.0% in June 2011 (which has reflected in WPI
inflation numbers for September 2011) to just 4.3% during October 2011 MTD
(expected to reflect in domestic inflation numbers from January 2012). Also, the impact
of the previous monetary tightening is yet to flow through fully, in our view. Hence, we
expect headline inflation to start moderating from December 2011 onwards.
Savings rate deregulation
Impact on retail deposit market share: In our view, high savings account balances
(and their proportion in the total deposit base) are indicative of a larger retail
customer base for any bank. In our view, the advantage of having a higher
proportion of retail funding will remain, irrespective of savings rate deregulation.
The deregulation will provide an additional tool for newer private banks (small as
well as large) to acquire customers by more targeted customer segmentation and
product attributes. Also, like in the case of FDs, smaller banks are likely to offer
50-100bp higher rates to try to attract customers. That said, in our view, public
trust and a wider network reach will remain the key factors in maintaining/gaining
retail customer market share and, hence, we would not expect any material
change in market share dynamics due to savings rate deregulation.
Longer-term impact on profitability: In our view, the advantage of savings accounts
being low-cost deposits will remain, irrespective of savings rate deregulation.
However, the advantage of savings accounts being fixed rate deposits will clearly
vanish – and this, we believe, is the key negative impact of savings rate
deregulation. In the context of the Indian banking system, the negative impact of
compulsory SLR investments, which are at a fixed coupon rate, was managed by
banks by virtue of corresponding fixed rate CASA deposits on the liability side.
Hence, in a rising interest rate environment, there was some extent of matching in
terms of interest re-pricing buckets by having fixed rate SLR investments countered
by fixed rate CASA. This advantage was clearly more so in case of high savings
banks – which will now erode. We have accordingly recalibrated our target
multiples to an extent, as we believe that the premium commanded by the larger,
high savings banks (HDFC Bank amongst private banks and SBI and PNB amongst
PSU banks) will marginally erode. While, at the other end of the spectrum, the
disadvantage of having relatively lesser share of low-cost funding will reduce to an
extent for low savings banks (such as Yes Bank).
Immediate impact on profitability: Since, the savings rate has been deregulated at
what we view as the peak of the interest rate cycle, wherein the gap between FD
rates and savings rate is at its widest, the above-mentioned impact of deregulation
on profitability is likely to be immediately felt in the next two quarters itself on
near-term earnings as well. In our view, to the extent that there is some scope for
the average cost of savings accounts to increase, we believe the average impact on
the overall banking sector would get passed on to customers. As per our
calculations, a 1% increase in savings rate would have a 20bp impact on the total
cost of funds for the sector as a whole and is likely to get passed on to a large
extent in the form of lending rate hikes and/or a cut in FD rates. We have assumed
75% of the incremental costs to be passed on to customers in our scenario
analysis. Evidently, for banks with a higher proportion of savings account
balances, the impact on total cost of funds will be higher and, in our view, this
incremental impact could be reflected in NIM compression in the near-term itself.
As per our scenario analysis, the highest percentage impact on PBT in case of
larger banks would be for banks such as SBI, PNB and Union Bank of India from
the PSU space and HDFC Bank from the private banking universe; and in case of
smaller banks, it would be for United Bank of India, Bank of Maharashtra, Central
Bank of India and Dena Bank. While the PBT impact for some of the PSU banks
appears the highest, at the same time most of their savings accounts balances are
from the rural hinterland where the concerned banks have minimal competition
and which in the near-term could shield the impact on their cost of funds from this
development.
As a corollary impact of the savings deregulation, we believe it will become all the
more unattractive for banks to hold any excess SLR and, hence, we maintain an
upward bias on government bond yields, which is likely to be exacerbated by this
development. This will increase the negative earnings impact on banks with a
higher proportion of high-duration SLR holdings in the AFS segment.
We have recalibrated our target P/ABV multiples for this change in regulation and
will look to revise earnings estimates depending on the actual changes in rates in
the coming weeks. In our view, among banks that are expected to gain the most
from this move will be new-age banks such as Yes Bank. These banks will also
gain from further liberalization of branch-licensing norms, in terms of not requiring
RBI approval for opening branches in Tier 2 to Tier 6 centers. We maintain our Buy
recommendation on Yes Bank with a target price of `347, implying an upside of
23.4% from current levels. Amongst the PSU banks, the banks that stand to benefit
the most include Corporation Bank on which we maintain our Buy rating with a
target price of `489, implying an upside of 20.8%.
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