[T.S.R:16462] India: Banks Under Severe Margin Pressure; Best Is Behind Them (Credit Suisse)

Credit Suisse-India Research

India: Banks Have Exited The Sweet Spot; Face Massive Drop In Earnings

Little room for rerating. Indian banks, particularly government banks, have YTD witnessed big rerating and are at 1.8x book (trading 2.0 s.d. above historical range). Government banks' valuations also do not appear cheap, factoring in the estimated pension fund underfunding (10-15% of book value).

Private banks at 3.0x book are also trading 1.0 s.d over their historical average. We believe Indian banks have exited the 'sweet spot', where rising rates were leading to margin expansion and GDP growth was accelerating.

We have UNDERPERFORM on SBI (largest likely adverse shift in asset and deposit mix) and wholesale funded financials (Yes). ICICI Bank (beneficiary of falling credit costs) is our top pick in the sector.

Rate increases sharper than expected. Deposit rates have moved up 150-350 bp over the past few months, well ahead of the 150 bp policy rate hike.Incremental deposit costs are up 150 bp, even after factoring in the benefit of the low-cost deposits.

Incremental spreads have contracted.

The domestic yield curve has also flattened and incremental spreads on investments have dramatically collapsed from a high of 3%-plus to virtually negative now. Banks have also raised lending rates by 50-75 bp. While, the increase in loan yields has not kept pace with the rise in deposit costs, NIMs expanded 50-100 bp, as deposit repricing comes through with a lag.

Adverse shift in mix.

Moreover, a favourable shift in asset and deposit mix was aiding NIM expansion, which is now set to reverse. Incremental loan deposit  ratio (LDR) YTD is 100%, which will moderate to a more sustainable 75% (in line with the reserve requirements). With investment spreads nearly 200 bp lower than loan spreads, a 25 pp moderation in incremental LDR translates to a 50 bp contraction in spread on incremental assets. On the funding side, banks were enjoying the benefit of low-cost deposits contributing 65% of incremental deposits over the past year.

With rising rates, as share of low-cost deposits normalises, a 30 pp shift in mix toward term deposits will translate to 1.5% rise in incremental cost of deposits.

 

On Fri, Dec 3, 2010 at 8:39 PM, chintan <chintan.2oct@gmail.com> wrote:

Rajiv Sir,

I am great fan of yours. I was receiving your mails regularly earlier but now as I have changed my company I am missing your mails.

Please send your valuable mails to my this email address.

--
Regards,

Chintan Patel

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