Fortnightly Banking Update | July 4th, 2012

Indian Banking Round Up

A DALMIA RESEARCH CENTRE REPORT

Banking sector continue to face headwinds Increased global risk appetite and bearish Key Highlights cut-offs at weekly auctions soften Gsec Yield. Credit growth reversal from 18% mark Credit growth stood at 17.8% during the fortnight ended 15th June 2012 down from 18.4% Gsec in fortnight ended 1st June 2012. Non food credit has grown by 17.5% YoY during the cur9.5 rent fortnight as against 17.8% growth in the previous fortnight. High interest rates, liquidity 9 crunch, muted corporate demand and lower mobilization of deposits resulted in declining 8.5 loan growth. 8 Deposits remain flat 7.5 Deposits improved marginally as witnessed by 14.4% YoY growth during the fortnight ended 15th June 2012 as against 14.1% during the fortnight 1st June 2012. However it declined by 0.4% sequentially. The banks continue to shed high cost deposits while investors preferred other alternative options in the wake of better real returns. Investments down FoF basis by Rs26 bn due to decline in CP investments Investments by banks during the current fortnight increased by 16.3% YoY vs 16.0% during Lower Gsec yields led to hardening of spreads fortnight ended 1st June 2012. The investments declined sequentially registering de-growth of 0.1% during the fortnight ended 15th June 2012 against growth of 1.2% during the previSpread ous fortnight. 1.70 Reserve money increased in line with higher CRR maintained by banks 1.50 Reserve money has grown by 8.2% YoY basis as on 15th June 2012 to Rs14.69 tn. Reserve 1.30 money has grown by 2.1% FoF basis which led to 220 bps growth FoF basis to 6.7% growth 1.10 in previous fortnight on account of higher CRR. Currency with the public has grown by 0.90 13.4% YoY to Rs10.91 tn and grown by 1.5% FoF basis. 0.70 Foreign exchange reserves declined by $0.8 bn due RBI intervention India's Foreign exchange reserves have shown growth during week ended 8th June 2012. We feel this is mainly on account of halt in RBIs support to falling rupee. Foreign exchange reserves have increased by $1.5 bn to $287.4 bn on the back of a improved foreign currency assets. Outlook Exposure to sensitive sectors is weighing heavily on banks asset quality. This is evident from spike in applications for restructuring growing by 57% YoY in FY12 and 310% in Q1FY13. Alongside, exposure to these sectors is expanding as prior commitments are withdrawn, increasing risk on their books. This will deteriorate asset quality thereby hampering banks earnings. We maintain our cautious stance on the sector. Banking Indicators at a Glance Rs bn Deposits - Demand Deposits - Time Deposits Credit - Food Credit - Non Food Credit Investments - SLR - Non SLR CD Ratio ID Ratio SLR CRR 15-Jun-12 61141.3 5874.2 55267.1 47146.6 1055.4 46091.2 20311.1 18457.6 1853.5 77.1 33.2 29.8 5.1 Fortnight ended 17-Jun-11 YoY ch 53447.0 14.4 5494.0 6.9 47953.0 15.3 40015.2 773.3 39241.9 17469.4 16053.9 1415.6 74.9 32.7 29.7 6.2 17.8 36.5 17.5 16.3 15.0 30.9 Key Policy Rates Repo CRR SLR WPI (May) IIP (Apr) 8 core sectors (MAY) HSBC PMI (Mfg) June (%) 8.00 4.75 24.00 7.55 0.10 4.6 55.0

1-Jun-12 FoF ch Avg weekly borrowing (Rs bn) 61377.7 -0.4 29-Jun-12 22-Jun-12 5929.5 -0.9 Call 174 233 55448.2 -0.3 CBLO 560 529 Mkt Repo 195 165 47121.9 0.1 Repo 895 1,153 1120.5 -5.8 46001.4 0.2 Avg weekly rates (%) 29-Jun-12 22-Jun-12 20337.1 -0.1 Call money 8.02 8.21 18459.3 0.0 CBLO 7.72 7.99 1877.8 -1.3 Market Repo 7.99 8.06 76.8 33.1 29.7 4.8 Zeenat Kerawala
(91-22) 3027 2829 Zeenat.kerawala@dalmiasec.com Dalmia Securities Private Limited

Please refer to the important disclosures and analyst certifications at the end of the document

BankingFortnightly Report July 4th, 2012

Credit growth reversal from 18% mark Credit growth stood at 17.8% during the fortnight ended 15th June 2012 down from 18.4% in fortnight ended 1st June 2012. Non food credit has grown by 17.5% YoY during the current fortnight as against 17.8% growth in the previous fortnight. High interest rates, liquidity crunch, muted corporate demand and lower mobilization of deposits resulted in declining loan growth. Trend in Non Food Credit
48.0 46.0 44.0 42.0 40.0 38.0 36.0 34.0 32.0 30.0 Non food credit (Rs tn) YoY growth (RHS) 21.0 19.0

17.0
15.0

Source: RBI, Dalmia Sec

Sectoral Deployment

The banks remained highly exposed towards sensitive sectors, as lending continues to infrastructure mainly towards power sector. However the build up growth in power sector remain negative. The Gems & Jewellery segment and metal products which saw major restructuring grew by 26% YoY during May 2012. Moreover banks maintained cautious stand during the month, by disbursing mortgage loans which contributed 9.5% of its loan book. The corporate book has grown by 18.8% followed by growth in services sector by 15.7%, agri portfolio which has grown by 14.6% and personal loan book witnessing 13.1% growth. Banks credit deployment sector-wise for the month of May 2012 Sector (In %) Agriculture Industry Infrastructure -Power Basic Metal & Metal Product Gems & Jewellery Textiles Services Commercial Real Estate NBFC Other Services Personal Loans Consumer Durables Housing Education Vehicle Loans Personal Loans YoY growth Build up growth Proportion of Non food credit 14.6 -1.1 12.0 18.8 0.1 45.9 13.3 0.7 14.5 13.7 -0.6 7.6 22.3 2.3 6.1 26.3 2.7 1.2 7.0 -2.6 3.6 15.7 -1.2 23.8 2.8 -2.2 2.7 41.0 9.0 5.6 6.1 -9.2 5.9 13.1 2.1 18.3 -29.0 -16.9 0.2 14.0 5.3 9.5 13.6 -0.5 1.2 19.7 2.0 2.3 14.5 1.3 3.2
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BankingFortnightly Report July 4th, 2012

Deposits remain flat Deposits improved marginally as witnessed by 14.4% YoY growth during the fortnight ended 15th June 2012 as against 14.1% during previous fortnight. However it declined by 0.4% sequentially. The banks continue to shed high cost deposits while investors preferred other alternative options in the wake of better real returns. Demand deposits has grown by 6.9% during the current fortnight as against 6.4% in the previous fortnight, while term deposits has grown by 15.3% during 15 June 2012 as against 15% on 1st June 2012. However, sequentially both demand and time deposits showed declining trend. We expect the growth in aggregate deposits to remain sluggish incase of any rate cuts.
6.8
19.0 18.0 17.0 6.6

62.0 60.0

Deposits (Rs tn)

YoY % growth (RHS)

CASA (Rs tn)

CASA Ratio (RHS)

12.0%

6.4
6.2 11.0%

58.0 56.0

16.0 15.0 54.0 52.0

50.0

6.0
5.8 10.0%

14.0 13.0
12.0

5.6
5.4

5.2

9.0%

Source: RBI, Dalmia Sec

Credit Deposit ratio (CD ratio) stood at 77.1% for current fortnight vs 76.8% during the previous fortnight. Incremental CD ratio stood at 92.7% lower from 96.3% during the previous fortnight. Investment deposit ratio (ID ratio) stood at 33.2% for fortnight ended 15th June 2012 vs 33.1% for previous fortnight. Incremental ID ratio stood at 36.9% for current fortnight vs 36.8% during previous fortnight. Higher CD ratio indicates widening gap between the loans and deposits which can be a cause of concern for banks in matching its asset liability across the buckets.

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BankingFortnightly Report July 4th, 2012

Investments down FoF basis by Rs26 bn due to decline in CP investments Investments during the current fortnight increased by 16.3% YoY vs 16.0% during fortnight ended 1st June 2012. The investments declined sequentially registering de-growth of 0.1% during the fortnight ended 15th June 2012 as against growth of 1.2% during the previous fortnight. Investment in Gsec declined by Rs1 bn FoF basis as against increase of Rs209.9 bn during the fortnight ended 1st June 2012. SLR investments proportion stood at 29.8% for the current fortnight vs 29.7% during previous fortnight. However banks investment in CPs has declined by Rs3.4 bn (1.3% de-growth FoF basis) as against an absolute growth of Rs23.3 bn (9.1% growth) during the previous fortnight. Investments break up
Govt sec
100%

Other approved sec

Comm paper

Shares

Bonds

98% 96% 94% 92% 90% 88% 86% 84%

5.2

6.1

6.0

2.2 0.7 0.3 1.9 1.3 0.1

1.9 1.2 0.1

91.6

90.6

90.7

17-Jun-11

1-Jun-12

15-Jun-12

Source: RBI, Dalmia Sec

Reserve money increased in line with higher CRR maintained by banks Reserve money has grown by 8.2% YoY basis as on 15th June 2012 to Rs14.69 tn. Reserve money has grown by 2.1% FoF basis which led to 220 bps growth FoF basis to 6.7% growth in previous fortnight on account of higher CRR. Currency with the public has grown by 13.4% YoY to Rs10.91 tn and grown by 1.5% FoF basis. On other hand money supply (M3) witnessed marginal growth of 14% YoY growth as on 15th June 2012 vs 13.7% during previous fortnight. M3 has declined by 0.1% FoF basis mainly attributed to decline in time deposit with banks. CRR stood at 5.1% as on 15th June 2012 against 4.8% as on 1st June 2012. Money Multiplier (MM) stands at 5.14x against 5.26x as on 1st June 2012. Going forward, we expect money supply to remain low on back of slow growth in deposits.
19.0 M3 Currency with Public MM 5.5

18.0
17.0
Y oY growth (%)

5.4
5.3

16.0
15.0

5.2
MM

5.1

14.0
13.0 12.0 11.0

5.0
4.9 4.8 4.7

Source: RBI, Dalmia Sec

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BankingFortnightly Report July 4th, 2012

Foreign exchange reserves declined by $0.8 bn due RBI intervention India's Foreign exchange reserves have declined by $0.8 bn for week ended 22nd June mainly on account of RBI intervention to support depreciating Rupee. Foreign exchange reserves have increased to $288.6 bn for week ended 22nd June against $289.4 bn for week ended 15th June 2012 on the back of declining foreign currency assets. The Foreign currency assets have declined WoW basis by $0.74 bn to $255 bn in week ended 22nd June 2012 vs $256.5 bn for previous week. The gold reserves were $25.6 bn unchanged at same level as previous week. The special drawing rights (SDRs) have also declined by $15 mn to $4.4 bn, while reserves with the IMF declined by $10 mn to $2.9 bn WoW basis. Foreign exchange assets were down by 7.7% YoY basis. All heads of foreign exchange assets basket are down YoY basis except gold reserves which have grown by 4.9% YoY to $25.6 bn for week ended 22nd June 2012 vs $24.4 bn for week ended 10th June 2011. Foreign exchange asset basket $ bn 22-Jun-12 Foreign currency assets Gold SDRs Reserves With IMF Total
Source: RBI, Dalmia Sec

15-Jun-12 256.5 25.6 4.4 2.9 289.4

WoW -0.3 0.0 -0.3 -0.3 -0.3

25-Jun-11 277.1 24.4 4.6 3.0 309

YoY -7.7 4.9 -4.6 -2.2 -6.6

255.8 25.6 4.4 2.9 288.6

Outlook Crude prices have cooled off resulting in ~50% reduction in losses of petrol companies. This has resulted in expectations for reduction in inflationary pressure. The 8 core industries have shown growth of 4.6% in May 2012 vs 2.2% growth in April 2012 indicating better numbers for IIP in month of May 2012. HSBCs PMI Index have shown some activity in manufacturing and service sector, but still remain at subdued levels. On other hand, credit growth has remained subdued at 17.8% in Q1FY13. Advances and deposit gap has widened as indicated by higher CD ratio of 77% thereby intensifying liquidity crunch. This will keep the borrowing cost elevated, impacting loan demand. Exposure to sensitive sectors is weighing heavily on banks asset quality. This is evident from spike in applications for restructuring growing by 57% YoY in FY12 and 310% in Q1FY13. Alongside, exposure to these sectors is expanding as prior commitments are withdrawn, increasing risk on their books. This will deteriorate asset quality thereby hampering banks earnings. We maintain our cautious stance on the sector.

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BankingFortnightly Report July 3rd, 2012 Institutional Sales Desk

R F Jetha Saurabh Marodia Malay Kampani President, Institutional Operation Sr. Vice President Vice President - Institution rfj@dalmiasec.com smarodia@dalmiasec.com malay.kampani@dalmiasec.com +912230272815-17 +919903393222 +919831246854

NonInstitutional Sales Desk

Rajesh Chura President, Operation rajesh.chura@dalmiasec.com +033 66120500

Disclosure Appendix
Rating Criteria BUY: Returns>15%; ACCUMULATE: 5%<Returns<15%; NEUTRAL: -5%<Returns<5%; REDUCE: -15%<Returns<-5%; and SELL: Returns<-15% Analyst(s) holding in the Stock : Nil Analyst Certification The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and no part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Dalmia Securities Private Limited

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