RBI in an attempt to protect the INR announces a reversal in its easy money stance. In a surprise move, RBI has announced a 200 bp hike in bank rate to 10.25%, sucking out Rs120 bn of liquidity through OMOs. It has capped banks’ borrowing under the LAF (repo window at 7.25%) to Rs750 bn, and for any incremental liquidity, banks will have to source funding at the now elevated bank rate of 10.25%. The measures are aimed at drying up excess INR liquidity in an attempt to reverse the slide in the currency. ■ Banks’ asset growth had outpaced deposit growth. Comforted by the Central Bank’s easy money stance, Indian banks’ loan growth was consistently running ahead of deposit growth for the past three years. Loan deposit ratios were therefore consistently rising; at 76%, LDRs are close to historic high (India has 27% reserve ratio). ALM mismatches at some of the banks had also aggravated over the past few years, as loan book tenures had been rising. ■ Downgrade high valuation, wholesale funded banks. These wholesale-funded entities (Yes, Kotak, BOI, Canara and the NBFCs), banks with high LDRs (IndusInd, Yes) and those with ALM mismatches will be the worst impacted with these moves, as they will be forced to curb asset growth in addition to facing margin pressures. Indian banks’ valuations till now were primarily determined by asset side comfort. With the liability part of the balance sheet also coming into focus, we see downside to stocks of wholesale funded retail lenders like Kotak (95% LDR) and IndusInd (82%) trading at ~3x book, and we downgrade these two to UNDERPERFORM from Neutral (Lower TPs to Rs618 from Rs680 and to Rs416 from Rs465, respectively). The biggest risk from this set of measures would be if the lack of liquidity precipitates the corporate asset quality problems. As liquidity becomes scarce, some of these assets may turn to NPLs on books quicker than expected earlier. We maintain our UNDERWEIGHT stance on the Indian banks sector.
Posted on: Tue, 23 Jul 2013 17:44:43 +0000
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