India Banking

  4Q Credit policy
 

May 04, 2011 The Reserve Bank of India took multiple steps in Q4 monetary policy to a)
rein in inflation, b) ensure higher provisioning by the banks as part of
prudential provisioning framework, c) lower the gap between term
deposits and savings rate and d) curtail the round tripping of money. The
RBI hiked the policy rates (now repo) by 50bps, increased savings rate by
50bps to 4% and lowered the credit growth target. The estimated hit on
the earnings due to higher savings rate and higher provisioning could be
3.5-10% on pre-tax profits. We believe, while the interest rates on
lending products will certainly go up, we do not expect a sharp increase in
deposit rates from hereon due to moderation in credit growth target by
the RBI to 19% and natural slowdown in growth momentum due to
multiple macro headwinds. In the near term we see pressure on the
earnings growth for the banks and hence the valuation multiples could
come under pressure. Our preferred picks are SBI, Axis, PNB, OBC & BOB.
Key measures:
a) Hike in repo rate and introduction of marginal standing facility
Comment: The RBI hiked the repo rate by 50bps to 7.25% and introduced
another borrowing facility for the banks called as marginal standing facility (MSF)
which will operate at 100bps above repo rate (i.e – 8.25%). We believe the MSF
will be without any collateral, any bank moving to MSF will set the MIBOR higher.
b) Higher savings rate by 50bps to 4%
Comment: Higher savings rate will impact the banks with higher CASA ratio.
Such banks are State Bank of India (48% - Dec'10), ICICI Bank (45%), Punjab
Natl. Bank (~40%). With an increase of 50bps in Savings rate will impact the NII
by 2.6-4.1% and Net profit by 4.1-9.6%. In our view, this will further push the
costs up and given the macro headwinds to credit growth, we believe, banks' NIMs
will be under further pressure. NIMs will contract by 9-14bps depending upon
CASA ratio.
Table 1: Impact on NIMs & BVPS
Impact on Impact on Adj BVPS
Bank Impact on NIM
earnings *
ICICI Bk 4.1% 9bps -0.6%
Axis Bank 3.5% 9bps -0.7%
SBI 9.3% 13bps -2.1%
BoB 5.5% 9bps -1.2%
BOI 9.6% 9bps -1.9%
Canara Bank 7.5% 10bps -1.7%
OBC 7.2% 8bps -1.3%
Union Bank 8.0% 10bps -1.9%
PNB 8.7% 14bps -2.1%
Source : HDFC Securities Institutional Research
Note * impact post higher provision at 1.5% of restructured advances and increase in saving
rates by 50bps. Impact on NIMs without considering any changes in yields

c) Higher provisioning requirement on certain categories of non-

performing advances
Comment: The sub-standard category will attract an additional provisioning of
10% (i.e. 20-25% on secured and unsecured respectively). And the secured
Rahul Jain
advances in doubtful category will attract 40% (against 30% earlier). This will
rahul.jain@hdfcsec.com
further push up the provisioning requirement by the banks.
91-22-6171 7344
As on Mar'10, banks with higher proportion of Sub-std. assets were Canara Bank,
Vishal Modi PNB and BOI. Higher coverage ratio will limit the impact, but we believe, the
vishal.modi@hdfcsec.com higher credit cost will be passed on to the borrowers esp. in risky and cyclical
sectors such as real estate, construction etc.
91-22-6171 7324

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 India Banking – 4Q Credit policy
Institutional Research
 
Table 2: New provisioning requirements on non-performing advances
% Current provisioning norms Revised
Sub-std. assets - Secured 10 15
Sub-std. assets - UnSecured 20 25

Doubtful advances (Secured)

- Upto 1yr 20 20
- Upto 1-3yr 30 40
- >3yr 100 100

Doubtful advances (Un-Secured) 100 100

Source : RBI

While we believe this is structurally a positive step to ensure higher provisioning so

that banks can withstand the bad times, large numbers of banks were anyways
following a stringent policy requirements and maintaining higher coverage ratio.
Table 3: Coverage ratio (3Q/4QFY11)
Reported coverage ratio Calculated coverage ratio
HDFC Bk 83% 83%
ICICI Bk 76% 76%
BOB 85% 75%
Axis Bk 81% 74%
BOI 72% 60%
IOB 65% 57%
OBC 77% 51%
Corp Bk 73% 50%
SBI * 64% 50%
Canara Bk* 76% 28%
PNB * 77% 65%
Union Bk* 70% 55%
Source : HDFC Securities Institutional Research
Note * ratio as on Dec’10

Table 4: Proportion of substandard and doubtful assets as % of gross NPAs

(FY10)
Substandard Doubtful assets
Bank - FY10
assets (1-3yr)
SBI 45% 5%
ICICI Bank 56% 19%
BOI 58% 11%
Canara Bank 75% Na
PNB 60% 23%
Union Bank 54% 25%
HDFC Bank 58% 3%
BOB 37% Na
OBC 46% 30%
Axis Bank 49% 3%
Corp Bank 41% 14%
Source : HDFC Securities Institutional Research

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 India Banking – 4Q Credit policy
Institutional Research
 

d) Higher provisioning on standard restructured loans:

Comment: Restructured standard loans will attract 2% provisioning in first 2yrs as
against 0.25-1% currently. We believe this could impact the banks’ profitability by
1-4% (based on incremental provisioning of 1.5%). Banks with higher proportion of
restructured advances are IOB, PNB, BOI, and SBI amongst others.

Table 5: The restructured advances and provisioning thereon (1.5% of

provisions).
Banks PBT FY12E Provision @1.5% Impact on PBT
SBI 224,031 4,913 2.2%
PNB 76,338 2,154 2.8%
BOI 47,027 1,597 3.4%
Canara Bk 56,641 1,312 2.3%
BOB 75,730 1,007 1.3%
OBC 28,185 790 2.8%
Union Bk 38,825 768 2.0%
ICICI Bk 87,809 296 0.3%
Axis Bk 66,731 290 0.4%
Source : HDFC Securities Institutional Research
e) Loans to MFIs:
Comment: The bank loans to all MFIs (including NBFCs) will be eligible for
classification as PSL provided the qualifying loans are in compliance with guidelines.
Banks with higher MFI exposure are ICICI Bank, Axis Bank etc.

f) Branch Authorisation policy:

Comment: A minimum of 25% of additional branches to be opened in unbanked
rural areas (tier 5 and tier 6 centres).The break even time period is normally 15-
18mths in rural and semi urban branches, therefore with a minimum of 25%
branches to be opened in rural areas, we believe there could be some cost
pressures.

g) Cap on investment in liquid schemes of debt oriented mutual funds:

Comment: A cap of 10% of networth is prescribed on investment in liquid schemes
of debt oriented mutual funds. The estimated networth of the banking system
would be around Rs4.3-4.5tn, implying that the investment can’t be more than
Rs430bn. The outstanding liquid schemes amounts Rs737bn as on Mar'11. As on
yesterday, as per our industry interactions, the banks balances in liquid schemes
were to the tune of Rs1.25tn.

h) Lower credit growth and deposit growth target:

Comment: For the fiscal 2012, credit growth is pegged at 19%, M3 growth at 16%
and deposits growth 17%. We believe while there will certainly will increase in
lending products, but a sharp increase in deposit products (not more than 25-
50bps) might not happen due to moderation in credit growth target by the RBI and
natural slowdown in growth momentum. Further, banks would wary of
accumulating enough surplus deposits without having sufficient avenue to deploy it.

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 India Banking – 4Q Credit policy
Institutional Research
 

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