banking dec10

7/29/2019 Banking Dec10

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Spike in wholesale rates

As a function of tight liquidity conditions (15-day average net repo at negative

INR 954bn), wholesale rates (refer Chart 4) shot up significantly over the past

seven days (3MCP rate up 40bps in seven days). Going forward, conditions are

likely to get tighter with advance tax outflow (~INR 550 bn)- a quarterly

phenomenon, coupled with redemption of CD worth INR 1.1-1.3 tn (market

estimates) expected by end of December 2010. Though RBI has assured that it

will keep liquidity within 1% of NDTL, its actions so far (relaxing SLR norms etc.)

have not comforted the market, reflecting in bond yields breaching the 8.2%

mark.

Wholesale giving way to retail deposit rates: SBI action

Signaling that pressure on liquidity could continue for some time, State Bank of

India (SBI) initiated a steep, unexpected 100bps (refer Chart 3) increase in therelevant retail 1-2 year bucket (refer Chart 1), signaling increase in demand for

funds to mop up lagging deposit growth. At 8.5% in the 1-2 maturity bucket, the

banks deposit rates are higher than those offered by peers. With the leader

setting the tone, others are expected to follow.

Best of margins behind us

Given the environment of tight liquidity and slow deposit mobilization (7% YTD

deposit growth against 10% credit growth), we believe cost pressures will be

more prevalent and the impact will be disproportionate across banks, with

relatively weaker franchises getting impacted more. We were expecting a decline

in margins given the rising cost of funds. We are building in 15bps margin

compression (PSB: 16bps, private: 10bps) over H2FY11 (refer Chart 7). However,

we believe higher-than-expected deposit rate increase could spill over to negative

bias on margins. A pick up in credit demand suggests presence of pricing power.

However, we believe it is unlikely to be passed on completely, leading to margin

compression. Considering disproportionate rise in cost of funds, we believe

smaller PSBs will be impacted more than large PSBs/private banks with a strong

liability franchise.

Outlook: Move to safer havens

From the perspective of margin protection, we like strong liability franchises

HDFC Bank, ICICI, SBI and Punjab National Bank. Overall, given the uncertain

environment and macro-headwinds, we reiterate our view (refer our report

Banking- Move to Safer Heavens dt. Nov 26, 2010) recommending investors to

skew their position 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.

December 6, 2010

Nilesh Parikh

+91-22- 4063 5470

[email protected]

Kunal Shah

+91-22-4040 7579

[email protected]

Vivek Verma

+91-22-4040 7576

[email protected]

India Equity Research | Banking and Financial Services Sector Update

BANKING

Unexpected rise in deposit rates a key margin headwind


2/6

2 Edelweiss Securities Limited

BFSI

Chart 1: SBI: deposit rate hike; deposit rate in 1-2 year maturity touched 8.5%

Source: Company, Edelweiss research

Chart 2: Deposit rate of SBI highest amongst peers


Chart 3: Last hike in 1-2 year maturity


0

35

70

105

140

175

0.0

2.0

4.0

6.0

8.0

10.0

15-45days

46-90days

91-180days

181days-1year

1year-554days

555days

556days-2years

2years-999days

1000days

1001days-3years

3-5years

5-8years

8-10years

(bps)

(%)

Deposit rate Hike

7.0

7.4

7.7

8.1

8.4

8.8

SBIN BOI UNBK BOB ICICIBC PNB HDFCB

(%)

Highest 1-2 year

0.0

20.0

40.0

60.0

80.0

100.0

SBIN BOI UNBK BOB ICICIBC PNB HDFCB

(bps

)

Hike


3/6

Edelweiss Securities Limited 3

BFSI

Chart 4: CD rates rising continuously amidst tight liquidity


Chart 5: Significant jump in CD rates over last 7 days


Chart 6: CD/bank credit well above the long-term average


0.0

2.0

4.0

6.0

8.0

10.0

1-Jan-10

15-Jan-10

29-Jan-10

12-Feb-10

26-Feb-10

12-Mar-10

26-Mar-10

9-Apr-10

23-Apr-10

7-May-10

21-May-10

4-Jun-10

18-Jun-10

2-Jul-10

16-Jul-10

30-Jul-10

13-Aug-10

27-Aug-10

10-Sep-10

24-Sep-10

8-Oct-10

22-Oct-10

5-Nov-10

19-Nov-10

3-Dec-10

(%

)

3M CD rate

8.0

8.2

8.4

8.6

8.8

9.0

18-Nov

-10

19-Nov

-10

20-Nov

-10

21-Nov

-10

22-Nov

-10

23-Nov

-10

24-Nov

-10

25-Nov

-10

26-Nov

-10

27-Nov

-10

28-Nov

-10

29-Nov

-10

30-Nov

-10

1-Dec

-10

2-Dec

-10

3-Dec

-10

4-Dec

-10

5-Dec

-10

6-Dec

-10

(%)

3M CD rate

0.0

2.5

5.0

7.5

10.0

12.5

5-Apr-02

5-Aug-02

5-Dec-02

5-Apr-03

5-Aug-03

5-Dec-03

5-Apr-04

5-Aug-04

5-Dec-04

5-Apr-05

5-Aug-05

5-Dec-05

5-Apr-06

5-Aug-06

5-Dec-06

5-Apr-07

5-Aug-07

5-Dec-07

5-Apr-08

5-Aug-08

5-Dec-08

5-Apr-09

5-Aug-09

5-Dec-09

5-Apr-10

5-Aug-10

(%)

CD/Bank credit CD/deposits

Average (CD/BC) Average (CD/deposits)


4/6


BFSI

Chart 7: We are building in 15bps margin compression over H2FY11 (PSB:

16bps; Private 10bps)


Table 1: Liquidity to be under pressure due to advance tax outflow in mid-December (INR bn)


Table 2: YTD Credit growth at 10% and deposit growth at 7%


(24)

(12)

0

12

24

36

Q210 Q310 Q410 Q111 Q211 Q311E Q411E

(bps)

Private PSU Coverage

Week ending on 12-Dec 19-Dec 26-Dec 2-Jan 9-Jan 16-Jan 23-Jan 30-Jan

OUTFLOW

Advance tax 550

Issuances

- Gsec 110 0 90 0 0 100 100 70

- T-Bill 50 30 30 30 35 35 50 45

- SDL 45 0 45 0 45 0 45 0

Total outflows 205 580 165 30 80 135 195 115

INFLOW

Interest payments 29 2 1 84 27 42 15 95

Redemptions 20 40 125 45 63 55 63 56

Total inflows 49 42 126 129 90 97 78 151

Incremental inflows (banking system) (156) (538) (39) 99 10 (38) (117) 36

Cumulative inflows/(outflows) (156) (694) (733) (634) (624) (662) (779) (743)

Cash flows for the next 8 weeks

W-o-W (%) Deposit growth Credit growth

10-Sep-10 0.4 0.9

24-Sep-10 0.4 1.2

8-Oct-10 1.7 1.4

22-Oct-10 1.8 0.2

5-Nov-10 (1.3) 1.6

19-Nov-10 0.8 0.8


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Edelweiss Securities Limited 5

BFSI

Chart 8: Hit on funding cost will be higher for Yes, Axis, ICICI & BOB


Note: Impact on funding cost assuming 200bps hike in wholesale deposit and 100bps hike in retail

deposit rates

0

30

60

90

120

150

0.0

18.0

36.0

54.0

72.0

90.0

Yes

Axis

BOB

Canara

BOI

ICICI

PNB

Union

SBI

HDFC

(bp

s)

(%

)

Retail dep mat < 1 yr Othr Dep mat < 1 yr

Wholesale as % of dep (RHS) Impact on COF (RHS)


6/6


BFSI

Edelweiss Research is also available on www.edelresearch.com ,Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai 400 021,Board: (91-22) 2286 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s) : Banking

Allahabad Bank, Axis Bank, Centurion Bank of Punjab, Federal Bank, HDFC Bank, ICICI Bank, IOB, Karnataka Bank, Kotak Mahindra Bank,

OBC, SBI, Yes Bank, IDFC, HDFC, LIC Housing Finance, PNB, Power Finance Corporation, Reliance Capital, SREI Infrastructure Finance,

Shriram City Union, Syndicate Bank and Union Bank.

EW Indices Recent Research

26-Nov-10 BFSI

Move towards saferheavens;Sector Update

25-Nov-10 LIC

Hou. Fin.

Headwinds galore;

Event Update

1,058 Reduce

24-Nov-10 BFSI CBI investigation on developerloans- no systemic risk;Sector Update

16-Nov-10 AxisBank

Enam deal; valueaccretive;Company Update

1,469 Buy

Date Company Title Price (INR) Recos

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Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 116 45 12 176

* 3 stocks under review

Market Cap (INR) 110 53 13

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

800

1,000

1,200

1,400

1,600

2-Dec-09 2-Jun-10 2-Dec-10

EW Banks and Financial Services Index Nifty

banking dec10

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