Monetary Policy Review - 03052011

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					                                                                                                           RBI Policy Review | Banking
                                                                                                                                May 3, 2011

                                                                                                       Vaibhav Agrawal
 RBI Monetary Policy Review                                                                            022 – 3935 7800 Ext: 6808
 Tackling inflation head-on
                                                                                                       Shrinivas Bhutda
                                                                                                       022 – 3935 7800 Ext: 6845
The Reserve Bank of India (RBI), stepping up its anti-inflationary stance, raised both
repo and reverse repo rates by 50bp each to 7.25% and 6.25%, respectively, in its
annual review of the monetary policy. The Central Bank maintained status quo on cash
                                                                                                       Varun Varma
reserve ratio (CRR) and statutory liquidity ratio (SLR) at 6.0% and 24.0%, respectively.
                                                                                                       022 – 3935 7800 Ext: 6847
The policy action was in-line with our expectations.                                         

Policy tone turns more hawkish

The tone of the overall policy statement has turned distinctly more hawkish. The RBI
has forecasted inflation to remain elevated, close to March 2011 levels (9.0%), over the
first half of FY2012, before moderating in the second half to 6.0%, as of March 2012.
The RBI believes that global commodity prices, which have surged in the recent months,
are at best likely to remain firm and may well increase further over the course of the
year, indicating that higher inflation will persist and may indeed get worse. Hence,
to contain inflation, the Central Bank has targeted at reducing overall demand by
increasing lending rates. Through the policy action, the RBI expects to contain inflation
by reigning in demand-side pressures and sustain growth in the medium term by
containing inflation.

Downside risks to GDP and consequently credit growth

With the signs of moderation emerging in the second half of FY2011, the RBI has
projected real GDP growth for FY2012 to be at 7.4–8.5%, with a probability of 90%
(baseline projection of 8%). This is lower than the Finance Minister’s budgetary target of
9.0%, highlighting the downside risks to the targeted GDP growth and, consequently,
credit growth.

Exhibit 1: RBI projections for FY2012 and FY2011 actuals
 Parameter                FY2011 Actual (%)                             FY2012 RBI projections (%)
 GDP growth                              8.6                          Baseline est. of 8.0 (7.4-8.5)
 WPI inflation                 9.0 (March-11)                     6.0 (Mar-12) with an upward bias
 Credit growth                          21.2                                                   19.0
 Deposit growth                         15.8                                                   17.0
 M3 growth                              15.9                                                   16.0
 Source: RBI, Angel Research

Transition to a single, independently varying policy rate

In order to more accurately signal the monetary policy stance, the RBI has decided to
switch to a single, independently varying policy rate – the repo rate. The weighted
average overnight call money rate will be the operating target of the monetary policy.
Reverse repo rate will continue to be operative, but it will be pegged at fixed 100bp
below the repo rate.

Please refer to important disclosures at the end of this report                                                                            1
                                                                                      RBI Policy Review

              Hike in savings bank rate

              In April 2011, the RBI had come out with a discussion paper on savings bank rate
              deregulation, delineating the pros and cons of the move and inviting feedback
              from the general public. The RBI has hiked the savings bank rate by 50bp to 4.0%
              with immediate effect, which is the first hike in the past 19 years, as the spread
              between saving deposit and term deposit rates has widened significantly in the
              recent period; this move by the RBI is possibly a precursor to the deregulation.

              While the impact of the hike will be more on banks with higher proportion of
              saving account deposits to total liabilities. Assuming no interest burden is passed
              on; overall negative impact is likely to be between 0.4-9.3% on the net profit level
              and 1-8bp on the return on assets. However we believe that banks will pass
              through some of the increased burden of cost of deposits through lending rate
              hikes and the impact could be up to 5bp at the return on assets level for banks
              with a higher proportion of saving deposits to total liabilities.

              Exhibit 2: Impact of a 50bp hike in SA interest rate
                                       Saving Account/ Saving Account/                 Impact on
              Bank                   Total Liabilities (%) Deposits (%)           FY2012E       FY2012E
                                               (FY2010)      (FY2010)             RoA (bp)       PAT (%)
              Dena Bank                            24.0              26.9               (8)           (9.3)
              IOB                                  20.2              23.9               (6)           (8.1)
              Bank of India                        17.5              20.9               (7)           (7.7)
              State Bank of India                  24.4              32.0               (9)           (7.6)
              UCO Bank                             15.4              17.4               (5)           (7.0)
              Union Bank (I)                       19.3              22.2               (7)           (6.8)
              Punjab National Bank                 26.3              31.3               (8)           (6.6)
              J & K Bank                           24.1              27.6               (8)           (6.4)
              South Indian Bank                    16.7              18.6               (5)           (6.4)
              Bank of Baroda                       18.9              21.8               (6)           (5.2)
              Oriental Bank                        14.4              16.5               (5)           (5.1)
              HDFC Bank                            22.4              29.8               (8)           (4.7)
              Indian Bank                          21.5              24.7               (7)           (4.7)
              Federal Bank                         17.4              21.1               (6)           (4.1)
              ICICI Bank                           14.6              26.3               (6)           (4.0)
              Corporation Bank                     11.7              14.0               (4)           (4.0)
              Axis Bank                            18.7              24.0               (6)           (3.5)
              IDBI Bank                              3.8               5.2              (2)           (3.0)
              Yes Bank                               1.1               1.5              (1)           (0.4)
              Source: Company, Angel Research; Note: for coverage banks assuming no pass-through of rates

              Increase in provisions for NPAs and restructured advances

              The RBI has increased provisioning requirements across the NPL bucket by 5–10%,
              post the relaxation of the 70% provisioning coverage norm. Even in case of
              restructured advances, provisioning requirements have been hiked to 2.0% from
              the existing 0.25–1.0% (depending on the category of advances). However, it is
              unclear whether the provisioning requirement for restructured advances is to be
              taken into consideration prospectively or retrospectively.

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                                                                                           RBI Policy Review

              The increase in NPA provisioning requirements will not affect our earnings
              estimates, since we have already factored in 70% provisioning coverage ratio for
              our coverage universe on a conservative basis. In case of restructured advances,
              assuming retrospective application, the impact on PBT on FY2011 ranges from
              0.1% to 10.7%.

              Exhibit 3: Increase in provisioning requirements
                                                Particulars                            Existing (%) Revised (%)
              Sub-standard advances                                                            10.0       15.0
              Unsecured exposures classified as sub-standard advances                          20.0       25.0
              Secured portion of advances, which have remained
                                                                                               20.0       25.0
              in ‘doubtful’ category up to one year
              Secured portion of advances, which have remained
                                                                                               30.0       40.0
              in ’doubtful’ category between 1–3 years
              Restructured standard advances in the first two years of restructuring       0.25-1.00       2.0
              Restructured NPA advances when upgraded to standard
                                                                                           0.25-1.00       2.0
              in the first year of upgradation
              Source: RBI, Angel Research

              Exhibit 4: Impact of hike in provisioning requirement on restructured advances
                                                                Restructured    Impact*             As a % of
              Bank                        Data as of
                                                              advances (` cr)     (` cr)         FY2011# PBT
              UCO Bank                        Mar-11                  6,325        101                  10.7
              IOB                             Dec-10                  7,578        121                   8.6
              IDBI Bank                       Mar-11                 10,547        169                   7.4
              Oriental Bank                   Mar-11                  7,377        118                   5.8
              Bank of India                   Mar-11                 10,645        170                   4.9
              Punjab National Bank            Dec-10                 14,362        230                   3.5
              Indian Bank                     Sep-10                  5,307          85                  3.2
              State Bank of India             Dec-10                 32,750        524                   3.0
              Union Bank of India             Dec-10                  5,257          84                  2.8
              Corporation Bank                Dec-10                  3,036          49                  2.5
              Federal Bank                    Sep-10                  1,244          20                  2.3
              Bank of Baroda                  Mar-11                  6,711        107                   1.9
              South Ind. Bank                 Mar-11                      451          7                 1.7
              Axis Bank                       Mar-11                  1,930          31                  0.6
              ICICI Bank                      Mar-11                  1,970          32                  0.5
              Dena Bank                       Mar-11                  1,213          19                  0.3
              HDFC Bank                       Mar-11                      640        10                  0.2
              Yes Bank                        Mar-11                       83          1                 0.1
              Source: Company, Angel Research; Note: *Assuming 1.6% incremental impact retrospectively;
                  Estimated PBT wherever results are yet to be declared

              Introduction of new window for overnight borrowings

              The RBI has also decided to introduce a new Marginal Standing Facility (MSF),
              under which banks can borrow overnight from the RBI up to 1% of their respective
              net demand and time liabilities (NDTL), with effect from May 7, 2011. This window
              will replace the existing second liquidity adjustment facility (LAF). However, the rate
              under this new facility will not be the repo rate as it used to be earlier, it would now

May 3, 2011                                                                                                 3
                                                                                 RBI Policy Review

              be 100bp above the repo rate (effective rate of 8.25%). This facility is likely to be in
              operation only in case a bank wants to dip into its SLR (in case of extremely tight
              conditions). As per the new scheme, the revised corridor will have a fixed width of
              200bp, with repo rate in the middle. The reverse repo rate will be 100bp below
              the repo rate; and MSF rate will be 100bp above it.

              Other highlights of the policy

                  In order to improve banking penetration and financial inclusion rapidly, the
                  RBI has mandated domestic scheduled commercial banks to allocate at least
                  25% of the total number of branches to be opened during a year to unbanked
                  rural (tier 5 and tier 6) centres.

                  The RBI has also accepted the broad framework of regulations recommended
                  by the Malegam Committee set up for micro-finance institutions (MFIs).
                  The recommendations of the committee include a margin cap of 12% and an
                  interest rate cap of 26% for lending to be classified as a priority sector loan.

                  The RBI will be appointing a committee for examining the existing classification
                  and suggest revised guidelines with regard to priority sector lending

                  The RBI has also imposed a prudential cap of 10% of the respective bank’s net
                  worth as of March 31 of the previous year for investments in liquid schemes of
                  debt-oriented mutual funds; this has been done to reduce liquidity risks arising
                  from systemic risk in times of stress/liquidity crunch.


              The RBI has clearly highlighted its concern on inflation by reducing its growth
              projections (basically demand-side pressures on inflation) for FY2012 compared to
              FY2011 and concentrating solely on containing inflationary pressures. We have
              reduced our earnings estimates for our banking sector coverage universe to take
              into account the increase in savings rate, as well as factor in lower credit growth
              for FY2012E. Also, with the upward bias in interest rates, downward risks to
              economic growth and consequently credit growth, we have reduced the target
              multiples for our banking sector coverage universe. On account of cheaper
              valuations post the sharp correction in banking stocks in the past few days and
              taking into account FY2012E and FY2013E earnings growth outlook,
              we remain positive on banks with structurally stronger deposit franchises. Our top
              pick in the large-cap universe remains Axis Bank. We also like ICICI Bank, State
              Bank of India and Bank of Baroda amongst the large caps. Considering the
              valuations, we also recommend a buy on Bank of India and Oriental Bank of

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                                                                                                                                RBI Policy Review

Exhibit 5: Recommendation summary
                                 CMP     Tgt. price    Upside   FY2013E           FY2013E      FY2013E       FY2011E-13E       FY2013E      FY2013E
Company                 Reco.
                                  (`)            (`)      (%)   P/ABV (x)     Tgt P/ABV (x)      P/E (x)     EPS CAGR (%)       RoA (%)      RoE (%)
AxisBk        Buy               1,231       1,661       34.9          2.0               2.7          9.8               23.1           1.6      21.6
FedBk         Accumulate         408           453      10.9          1.1               1.2          8.0               22.6           1.4      14.2
HDFCBk        Buy               2,236       2,582       15.5          3.0               3.5         15.8               29.5           1.7      20.7
ICICIBk*      Buy               1,068       1,355       26.9          2.0               2.5         15.5               24.0           1.5      15.6
SIB           Neutral              22             -         -         1.3                  -         8.7                0.0           0.7      14.2
YesBk         Buy                287           334      16.3          1.8               2.2         10.2               16.0           1.2      19.7
BOB           Buy                864        1,054       22.0          1.2               1.5          6.6                9.9           1.1      19.3
BOI           Buy                394           490      24.4          1.0               1.3          6.0               20.0           0.8      18.1
CorpBk        Buy                575           674      17.2          0.9               1.1          5.3                6.5           0.9      18.0
DenaBk        Buy                  98          116      18.5          0.7               0.9          4.7                6.1           0.8      16.1
IDBI#         Neutral            136              -         -         0.9                  -         6.3               13.7           0.7      14.3
IndBk         Accumulate         233           267      14.6          0.9               1.1          5.1                8.5           1.4      19.8
IOB           Accumulate         152           171      12.2          0.9               1.1          5.9               23.9           0.8      16.4
J&KBk         Accumulate         782           877      12.1          0.8               1.0          5.8                3.5           1.2      15.6
OBC           Buy                334           403      20.6          0.7               0.9          5.2               11.8           1.0      15.3
PNB           Buy               1,093       1,331       21.9          1.2               1.5          6.2               12.9           1.2      21.6
SBI*          Buy               2,583       3,199       23.8          1.7               2.1          8.9               27.3           1.2      21.1
UcoBk         Neutral              99             -         -         1.0                  -         6.4               14.2           0.6      17.6
UnionBk       Buy                303           371      22.4          1.1               1.3          5.6               15.0           1.0      20.2
Source: Company, Angel Research; Note:*Target multiples=SOTP Target Price/ABV (including subsidiaries), #Without adjusting for SASF

May 3, 2011                                                                                                                                       5
                                                                                                                         RBI Policy Review

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Sarabjit Kour Nangra                                                        VP-Research, Pharmaceutical                                                          
Vaibhav Agrawal                                                             VP-Research, Banking                                                                 
Shailesh Kanani                                                             Infrastructure                                                                       
Sageraj Bariya                                                              Fertiliser, Mid-cap                                                                  
Srishti Anand                                                               IT, Telecom                                                                          
Bhavesh Chauhan                                                             Metals, Mining                                                                       
Chitrangda Kapur                                                            FMCG, Media                                                                          
Jai Sharda                                                                  Mid-cap                                                                              
Sharan Lillaney                                                             Mid-cap                                                                              
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Varun Varma                                                                 Research Associate (Banking)                                                         
Vasant Lohiya                                                               Research Associate (Banking)                                                         
Poonam Sanghavi                                                             Research Associate (Pharmaceutical)                                                  

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