Bank NPAs Set To Rise As RBI Changes Reporting Norms

Net NPAs of most banks will rise because of the effect of a recent circular by the Reserve Bank of India, that has taken most bankers by surprise. In the circular issued a few days ago, the RBI disallowed banks the option of using excess provisions (floating provision) to set off against gross NPAs, thus denying them a means of showing a lesser net NPA level in their balance sheets.   Earlier, the banks had this option. Conversely, they could take the floating provision to Tier-II capital. Now, the option is not there — banks will necessarily have to take floating provision amount to Tier-II capital. In effect, the excess provisions will be treated like retained earnings.   One banker said that the circular would have the effect of raising net NPAs of banks by anywhere between 20 and 50 basis points. Different banks have different amounts as floating provisions and hence they would be affected differently.   For example, published figures show that Indian Bank has Rs 92 crore of floating provisions. The bank may be an outlier, the impact may not be much. Net NPA may go up by about 15 basis points. Indian Overseas Bank has about Rs 170 crore and the impact may be about 25-30 basis points. The private sector City Union Bank has Rs 19 crore of floating provisions. The impact may be about 30 basis points.   All the bankers that Business Line spoke to, said on conditions of anonymity that the circular is a big let down by the RBI. Most banks are adequately capitalised and hence the positive impact on capital adequacy is estimated to be negligible.   On the other hand, bankers delight in showing low net NPA levels.   Many bankers gave vent to their feelings more on the point of principle — there was no consultation by the RBI, the circular came out of the blue. Nor has any reason been given.   Besides, the provisions are made out of profits earned. Bankers said that unlike the manufacturing industry, banks ought to moderate profits using excess provisioning as banks cannot be seen as being highly profitable in one year and less so in the next as it would affect public sentiment.

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[Investors Please Listen] Banking - RBI guidelines-increased Net NPA; No economic impact; sector update

 

The Reserve Bank of India (RBI) has issued a new set of guidelines on various loan provisions. Overall, these guidelines are unlikely to have any significant impact on our estimates. While there is no economic impact, net NPA ratios of some banks are likely to increase 50-100bps and tier-II capital ratios will go up by 60-80 bps.

 

Key highlights of new RBI guidelines

As per the new guidelines, floating provisions cannot be netted from gross NPAs to arrive at net NPAs. Until recently, some banks were using floating provisions as part of their provision coverage, which kept their reported net NPA ratios low. Now, when these floating provisions will cease to be a part of the provision coverage, reported net NPA ratios of these banks will rise; also, provision coverage will come down without any change in gross NPA numbers.

 

We are puzzled by the timing and nature of these guidelines as it penalizes the banks which have strengthened the balance sheet in the past by creating these floating provisions. However on the positive side, this will give much clearer picture of specific provisioning policies of each bank.

 

The reported net NPA ratio will increase 70-100bps for Punjab National Bank (PNB), Federal Bank and Union Bank. As these banks had net NPA ratio of less than 0.5% as of December 2008, an increase in net NPA/fall in provision coverage could have some sentimental negative impact. Private banks and State Bank of India (SBI) are unlikely to be materially impacted as they do not have floating provisions.

 

We would expect the affected banks to seek one-time approval to create specific provisions by using existing floating provisions.

 

Our view –No Economic impact

We believe that the increase in net NPA of a bank is negated by the existing understatement of core book of the bank, thus implying zero impact on the adjusted book value.

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[Investors Please Listen] Bond Supplies - Government doles out 2/3rds of budgeted FY10 borrowing in H1FY10

Government doles out 2/3rds of budgeted FY10 borrowing in H1FY10

As we enter into FY10 when the government and RBI are expected to steer the economy from the ongoing slump through various monetary and fiscal tools and the tax kitty is likely to shrink due to the rates reduction and the overall economic contraction, capital receipts will play a significant role in financing the INR 9.5 tn expenditure bill.

 

The RBI, on March 26, announced the H1FY10 borrowing program at INR 2.41 tn, with an estimated weekly borrowing (bonds, bills and state development loan, SDL) of INR 230 bn (table 1). Given below are some details of the borrowing program:

n         Compared with INR 960 bn in H1FY09, INR 2410 bn will be auctioned in H1FY10.

n         With debt servicing of INR 1.01 tn in H1FY10, net borrowing is INR 1.41 tn.

n         Of INR 1.01 tn, INR 330 bn is in bond redemptions and remaining in interest payments.

n         OMO buyback would continue over the next 6-months; INR 800 bn worth bonds are expected to be bought back, equally distributed over the two quarters.

n         MSS bonds and bills worth INR 420 bn would be unwound over H1 FY10, INR 375 bn in Q1 and rest over next quarter.

n         In Q1FY10, the monthly issuance will be INR 480 bn against INR 320 bn in Q2.

 

The benchmark yield shot 20bps to 7.18% as a knee jerk to borrowing programme release; however, it recovered and closed at 7%. As the details of the financing the auction through OMO and MSS unwinding was released after market hours we can anticipate positive opening on March 30.

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Imp- No charges for ATM cash withdrawal from April 1, 2009

Date: Mar 10, 2008 Customer charges for use of ATMs for cash withdrawal and balance enquiry RBI/2007-2008/ 260 DPSS No.1405 / 02.10.02 / 2007-2008 March 10, 2008 The Chairman / Chief Executive Officer (All Scheduled commercial banks including RRBs) Dear Sir Customer charges for use of ATMs for cash withdrawal and balance enquiry 1. Automated Teller Machines (ATMs) have gained prominence as a delivery channel for banking transactions in India. Banks have been deploying ATMs to increase their reach. While ATMs facilitate a variety of banking transactions for customers, their main utility has been for cash withdrawal and balance enquiry. As at the end of December 2007, the number of ATMs deployed in India was 32,342.. Commensurate with the branch network, larger banks have deployed more ATMs. Most banks prefer to deploy ATMs at locations where they have a large customer base or expect considerable use. To increase the usage of ATMs as a delivery channel, banks have also entered into bilateral or multilateral arrangements with other banks to have inter-bank ATM networks. 2. It is evident that the charges levied on the customers vary from bank to bank and also vary according to the ATM network that is used for the transaction. Consequently, a customer is not aware, before hand, of the charges that will be levied for a particular ATM transaction, while using an ATM of another bank. This generally discourages the customer from using the ATMs of other banks. It is, therefore, essential to ensure greater transparency. 3. International experience indicates that in countries such as UK, Germany and France, bank customers have access to all ATMs in the country, free of charge except when cash is withdrawn from white label ATMs or from ATMs managed by non-bank entities. There is also a move, internationally, to regulate the fee structure by the regulator from the public policy angle. The ideal situation is that a customer should be able to access any ATM installed in the country free of charge through an equitable cooperative initiative by banks. 4. In view of this, RBI had placed on its website an Approach paper and sought public comments. The comments received have been analysed. Based on the feed back a framework of service charges would be implemented by all banks as under: Sr.No. Service Charges (i) For use of own ATMs for any purpose Free (with immediate effect) (2) For use of other bank ATMs for balance enquiries Free (with immediate effect) (3) For use of other bank ATMs for cash withdrawals No bank shall increase the charges prevailing as on December 23, 2007 (i.e. the date of release of Approach Paper on RBI website) Banks which are charging more than Rs.20 per transaction shall reduce the charges to a maximum of Rs.20 per transaction by March 31, 2008 Free - with effect from April 1, 2009. 5. For the services at (1) and (2) above, the customer will not be levied any charge under any other head and the service will be totally free. 6. For the service number (3) the charge of Rs.20/- indicated will be all inclusive and no other charges will be levied to the customers under any other head irrespective of the amount of withdrawal. 7. The service charges for the following types of cash withdrawal transactions may be determined by the banks themselves: (a) cash withdrawal with the use of credit cards (b) cash withdrawal in an ATM located abroad. 8. Please acknowledge the receipt of the circular. A copy of the circular issued to your branches on this subject may please be submitted to us in due course.

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EXPORT-IMPORT BANK OF INDIA : TERM DEPOSIT SCHEME

Interest Rate effective from March 16, 2009

Amount (in Rs.)	Perdiod (months)	Rate of Interest
Upto and inclusive of Rs. 1 Crore	12-60	9.25 % p. a.
Above Rs. 1 Crore	12-60	8.00% p. a.

^* The rate is applicable to Resident Individuals, NRIs, HUFs and Superannuation Funds only. Corporates / Institutional Investors should obtain prevailing rate from Exim Bank on a day to day basis. The benefit of increase in interest rate is now available to the existing term deposits for the residual period till maturity at the interest rate currently applicable to the residual tenor.

NOTE :

1. Interest compounded on quarterly basis.
2. Minimum Deposit of Rs.10,000/- and in multiples of Rs.1,000/- thereafter.
3. Interest is subject to deduction of tax at source, wherever applicable.
4. The above rates are applicable to Resident Individuals, NRIs, HUFs and Superannuation Fund, Army Group Insurance and Army Defence Regiment Funds, IIMs, IITs.
5. Senior citizens will be eligible for additional interest at 0.25% p.a. on deposits placed for 12-35 months and 0.50% p.a. on deposits placed for 36 months and above.
6. Cheques/Demand Drafts to be drawn favouring ‘Exim Bank Term Deposit Account’.

 

Term Deposit scheme FAQ

Flexibility

1. The benefit of future increases in interest rates will be available to the existing term deposits for the residual period till maturity at the interest rate applicable to the residual maturity period, without any action on the part of the depositor.
2. In case the existing rate on a deposit (contracted based on original maturity at the time of placing deposit) is higher than the revised rate applicable to the residual tenor, then the original higher rate would continue to apply.
3. The above flexibility is available only on deposits placed by individuals/NRIs/trusts/HUFs and superannuation funds.
4. Interest rate on 3-year and 5-year floating rate term deposits could be benchmarked to 3-year and 5-year G-sec rates respectively.
5. For further details or clarification please contact us at: (Phone No. 0-9818269396) or Email @ investorspleaselisten@in.com

PSU Banking Sector Update; Tale of two times

PSU Banking

 Tale of two times 

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The banking stocks, PSU bank stocks in particular have outperformed the broader markets by upto 30% over past two months, rightly driven by 280+bps dip in the G-Sec yields. While, one may get carried away by the robust treasury gains that the PSU banks may report, we believe that over next twelve months odds are more against the PSU banks than in favour. For one, a faster drop in the lending rates, (~150bps till date) and also differential interest rates vis-à-vis deposit rates (~50-100bps till date) would raise question marks on the NIMs. While the scene on the NIMs is similar to that witnessed in 2002-07, the key difference is the interest rates this time have been cut under panic rather than driven by the inflation. And for two, the issue of directed lending seems to emerging driven by stimulus packages by the central government. Directed lending during 1990s had helped only NPAs rise by 50%+ during the period. Third, while the treasury gains contributed 60% of the networth cumulatively over FY02-05, the treasury gains are likely to contributed just 3-13% to networth now. We believe that the banks with better CASA profile, wider branch network and strong asset quality would be better placed in such scenario. With that in mind we would prefer BoB, UBI and PNB. We would less prefer Allahabad Bank, Canara Bank, Corporation Bank and State Bank of India.

NIMs could come under pressure

The PSU banks have cut their prime lending rates by ~150bps over past two months reflecting partially, the dramatic cut in the policy rates and partially driven by push from the government. We believe that a similar fall in the cost of deposits is not likely to happen. The contraction in NIMs could be ranging from 9-19bps. While the scenario may look similar to 2002-07, there are some differences here. One, the rate cuts were spurred by search for growth and not liquidity. Two, the demand deposit contributed 25% of the deposit growth in 2003-06. They will be hard to come by now. Three, with lower industrial growth, the competition will be more for smaller pie of term deposits. Despite strong growth in demand deposits, the NIMs of PSU banks fell by 50bps over 2004-07 even as the bank nifty rose by 150% during the same period driven by economic and credit growth, treasury gains and low NPAs.

Asset quality may be camouflaged

We believe that the asset quality becomes all the more important factor now. In the stimulus packages announced till date, the banks have been made conduits of directed lending in sectors like housing. There are more such packages likely to come. As rightly, pointed out by the Narasimham Committee in 1998, the pursuit of growth objectives should use the fiscal system rather than the credit system. During 1990s, the NPAs of the PSU banks had risen by ~50% to Rs540bn. During the same period, SBI's stock price tumbled by ~60%.

Over, last quarter we have seen some lenient policies coming from the RBI on the asset quality front with more relief being asked by the banks. We believe that in such situation, there is a high likelihood that the NPAs may remain hidden under camouflage. We believe that now on, the restructured assets of the PSU banks would require investors' watchful eye.

Treasury gains may not last long

The G-Sec yields have again hardened back to 6.1% in January 2009 after touching a low of <5%. We believe that the magnitude of the monetary easing now is likely to be slower than earlier. Apart from the same, the government borrowings are likely to be higher by ~40% at Rs500bn from Q4FY09 than the earlier estimates. Hence, we believe that the gains on the bond portfolio may be capped from hereon. Also, quite unlike FY2002-05 when the treasury gains contributed nearly 60% to the networth, the contribution to net worth this time is likely to be limited to only 3-13%.

Faster growth and higher NPAs could entail early equity dilution

Most of the PSU banks are likely to face shortage of tier I capital in FY10E. Higher NPAs and faster balance sheet growth could entail equity dilution for the PSU banks even earlier than that. The announcement of Rs200bn recapitalization of PSU banks could be a precursor to such event. In case, the government comes out with a rights issue it may be book value dilutive since many PSU bank stocks are trading at sub-book value.

Valuation and view

The PSU bank stocks have outperformed the Sensex by upto 30% over last tow months in anticipation and in line with the drop in the bond yields. However, from hereon the performance of the PSU banks will have to reflect the movement of NIMs and asset quality. We believe that the banks with better CASA profile, wider branch network and strong asset quality would be better placed in such scenario. In such case, we would prefer BoB, UBI and PNB. We would less prefer Allahabad Bank, Canara Bank, Corporation Bank and State Bank of India

There is two change in our recommendation: Downgrading Canara Bank to REDUCE from ACCUMULATE and Allahabad Bank from BUY to HOLD

There are five changes in our price targets: Downgrading price target for Allahabad Bank to Rs75, Corporation Bank to Rs240 and State Bank of India to Rs1,500 and upgrading price target for BoB to Rs350 and for PNB to Rs580

 

PSU Banking Sector Update; Tale of two times

PSU Banking

 Tale of two times 

---

The banking stocks, PSU bank stocks in particular have outperformed the broader markets by upto 30% over past two months, rightly driven by 280+bps dip in the G-Sec yields. While, one may get carried away by the robust treasury gains that the PSU banks may report, we believe that over next twelve months odds are more against the PSU banks than in favour. For one, a faster drop in the lending rates, (~150bps till date) and also differential interest rates vis-à-vis deposit rates (~50-100bps till date) would raise question marks on the NIMs. While the scene on the NIMs is similar to that witnessed in 2002-07, the key difference is the interest rates this time have been cut under panic rather than driven by the inflation. And for two, the issue of directed lending seems to emerging driven by stimulus packages by the central government. Directed lending during 1990s had helped only NPAs rise by 50%+ during the period. Third, while the treasury gains contributed 60% of the networth cumulatively over FY02-05, the treasury gains are likely to contributed just 3-13% to networth now. We believe that the banks with better CASA profile, wider branch network and strong asset quality would be better placed in such scenario. With that in mind we would prefer BoB, UBI and PNB. We would less prefer Allahabad Bank, Canara Bank, Corporation Bank and State Bank of India.

NIMs could come under pressure

The PSU banks have cut their prime lending rates by ~150bps over past two months reflecting partially, the dramatic cut in the policy rates and partially driven by push from the government. We believe that a similar fall in the cost of deposits is not likely to happen. The contraction in NIMs could be ranging from 9-19bps. While the scenario may look similar to 2002-07, there are some differences here. One, the rate cuts were spurred by search for growth and not liquidity. Two, the demand deposit contributed 25% of the deposit growth in 2003-06. They will be hard to come by now. Three, with lower industrial growth, the competition will be more for smaller pie of term deposits. Despite strong growth in demand deposits, the NIMs of PSU banks fell by 50bps over 2004-07 even as the bank nifty rose by 150% during the same period driven by economic and credit growth, treasury gains and low NPAs.

Asset quality may be camouflaged

We believe that the asset quality becomes all the more important factor now. In the stimulus packages announced till date, the banks have been made conduits of directed lending in sectors like housing. There are more such packages likely to come. As rightly, pointed out by the Narasimham Committee in 1998, the pursuit of growth objectives should use the fiscal system rather than the credit system. During 1990s, the NPAs of the PSU banks had risen by ~50% to Rs540bn. During the same period, SBI's stock price tumbled by ~60%.

Over, last quarter we have seen some lenient policies coming from the RBI on the asset quality front with more relief being asked by the banks. We believe that in such situation, there is a high likelihood that the NPAs may remain hidden under camouflage. We believe that now on, the restructured assets of the PSU banks would require investors' watchful eye.

Treasury gains may not last long

The G-Sec yields have again hardened back to 6.1% in January 2009 after touching a low of <5%. We believe that the magnitude of the monetary easing now is likely to be slower than earlier. Apart from the same, the government borrowings are likely to be higher by ~40% at Rs500bn from Q4FY09 than the earlier estimates. Hence, we believe that the gains on the bond portfolio may be capped from hereon. Also, quite unlike FY2002-05 when the treasury gains contributed nearly 60% to the networth, the contribution to net worth this time is likely to be limited to only 3-13%.

Faster growth and higher NPAs could entail early equity dilution

Most of the PSU banks are likely to face shortage of tier I capital in FY10E. Higher NPAs and faster balance sheet growth could entail equity dilution for the PSU banks even earlier than that. The announcement of Rs200bn recapitalization of PSU banks could be a precursor to such event. In case, the government comes out with a rights issue it may be book value dilutive since many PSU bank stocks are trading at sub-book value.

Valuation and view

The PSU bank stocks have outperformed the Sensex by upto 30% over last tow months in anticipation and in line with the drop in the bond yields. However, from hereon the performance of the PSU banks will have to reflect the movement of NIMs and asset quality. We believe that the banks with better CASA profile, wider branch network and strong asset quality would be better placed in such scenario. In such case, we would prefer BoB, UBI and PNB. We would less prefer Allahabad Bank, Canara Bank, Corporation Bank and State Bank of India

There is two change in our recommendation: Downgrading Canara Bank to REDUCE from ACCUMULATE and Allahabad Bank from BUY to HOLD

There are five changes in our price targets: Downgrading price target for Allahabad Bank to Rs75, Corporation Bank to Rs240 and State Bank of India to Rs1,500 and upgrading price target for BoB to Rs350 and for PNB to Rs580

 

Q3FY2009 Banking earnings preview dated January 06, 2009

Q3FY2009 Banking earnings preview  Business growth remains robust: Amidst the rising concerns at the macro level, the business growth at the industry level remained strong in Q3FY2009. The year-till-date (YTD) credit growth (till December 19, 2008) stands at 24.4%, better than the ~22.0% credit growth recorded in the comparable period of the last year. The healthy credit demand is primarily due to the fact that alternative funding sources (external commercial borrowings, foreign currency convertible bonds) have dried up with rising risk aversion. Though the role of domestic banks has increased, we believe that the credit growth is expected to moderate going forward on the back of the economic slowdown. NIMs likely to remain flat sequentially: The net interest margin (NIM) for most of the banks under our coverage is likely to remain stable as we believe that the aggressive cuts in reserve requirements (cash reserve requirement [CRR] cut by 400 basis points [including the 50-basis-point cut effective January 17, 2009]) would help offset the cuts in the prime lending rates (PLRs; of 50-75 basis points effective in Q3FY2009).  PSBs to benefit from MTM write-backs: The bond yields continued their declining trend during Q3FY2009 and have come off by ~300 basis points since Q2FY2009. Consequently, banks are likely to write back the marked-to-market (MTM) provisions made during the first quarter of the current fiscal. The impact of this is likely to be more pronounced in case of the public sector banks (PSBs; especially State Bank of India [SBI] and Union Bank of India [UBI]). However, the extent of the write-backs would depend on the changes in the composition of bank's investment portfolio during the quarter and the timing of realisation of write-back benefit.  Asset quality at centre-stage: In addition to the concerns over profitability, worries over the quality of assets of banks are on rise owing to the slowing economic growth and the after-effects of the high interest rates. Already, industry level data has indicated a reversal in trend of improving asset quality. The quality of banks' assets will remain at the centre-stage and will be keenly watched in the earnings seasons to come. For the quarter ended December 31, 2008, we expect Bank of India, Punjab National Bank and State Bank of India from the public sector and HDFC Bank from the private sector to outperform. Meanwhile, we believe ICICI Bank, HDFC and Allahabad Bank are likely to be among the underperformers. Click here to read report:  Sharekhan Special

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Q3FY2009 Banking earnings preview dated January 06, 2009

Q3FY2009 Banking earnings preview  Business growth remains robust: Amidst the rising concerns at the macro level, the business growth at the industry level remained strong in Q3FY2009. The year-till-date (YTD) credit growth (till December 19, 2008) stands at 24.4%, better than the ~22.0% credit growth recorded in the comparable period of the last year. The healthy credit demand is primarily due to the fact that alternative funding sources (external commercial borrowings, foreign currency convertible bonds) have dried up with rising risk aversion. Though the role of domestic banks has increased, we believe that the credit growth is expected to moderate going forward on the back of the economic slowdown. NIMs likely to remain flat sequentially: The net interest margin (NIM) for most of the banks under our coverage is likely to remain stable as we believe that the aggressive cuts in reserve requirements (cash reserve requirement [CRR] cut by 400 basis points [including the 50-basis-point cut effective January 17, 2009]) would help offset the cuts in the prime lending rates (PLRs; of 50-75 basis points effective in Q3FY2009).  PSBs to benefit from MTM write-backs: The bond yields continued their declining trend during Q3FY2009 and have come off by ~300 basis points since Q2FY2009. Consequently, banks are likely to write back the marked-to-market (MTM) provisions made during the first quarter of the current fiscal. The impact of this is likely to be more pronounced in case of the public sector banks (PSBs; especially State Bank of India [SBI] and Union Bank of India [UBI]). However, the extent of the write-backs would depend on the changes in the composition of bank's investment portfolio during the quarter and the timing of realisation of write-back benefit.  Asset quality at centre-stage: In addition to the concerns over profitability, worries over the quality of assets of banks are on rise owing to the slowing economic growth and the after-effects of the high interest rates. Already, industry level data has indicated a reversal in trend of improving asset quality. The quality of banks' assets will remain at the centre-stage and will be keenly watched in the earnings seasons to come. For the quarter ended December 31, 2008, we expect Bank of India, Punjab National Bank and State Bank of India from the public sector and HDFC Bank from the private sector to outperform. Meanwhile, we believe ICICI Bank, HDFC and Allahabad Bank are likely to be among the underperformers. Click here to read report:  Sharekhan Special

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Stimulus II- sectoral approach

As compared to the Stimulus I that cut across every business segments by
reducing Cenvat by 4%, Stimulus II is trying to address certain specific sectors
like infrastructure, real estate, CVs, metals and cement. It not only provides for
funding through NBFC/bank/ECBs but also charts path for NBFC/banks to raise
finance. The issue in the current sluggish economy is availability of finance at a
reasonable cost. The freedom provided to real estate companies to raise funds for
integrated townships look very positive apparently but is very difficult
considering the fact that the ECB finance is dried out. Depreciation benefit to CV
companies may not improve the demand but it can certainly reduce inventories.
Any move to help the industries by using PSU banks line of credit would benefit
the relevant sectors but could raise a question on quality of assets of the PSU
banks and the history on similar moves have not been very encouraging for PSU
bank’s health. The role of infrastructure NBFC and IIFCL will be crucial for the
growth of the sector. We might see some announcements from large industry
players to form infra NBFCs.

Stimulus II- sectoral approach

As compared to the Stimulus I that cut across every business segments by
reducing Cenvat by 4%, Stimulus II is trying to address certain specific sectors
like infrastructure, real estate, CVs, metals and cement. It not only provides for
funding through NBFC/bank/ECBs but also charts path for NBFC/banks to raise
finance. The issue in the current sluggish economy is availability of finance at a
reasonable cost. The freedom provided to real estate companies to raise funds for
integrated townships look very positive apparently but is very difficult
considering the fact that the ECB finance is dried out. Depreciation benefit to CV
companies may not improve the demand but it can certainly reduce inventories.
Any move to help the industries by using PSU banks line of credit would benefit
the relevant sectors but could raise a question on quality of assets of the PSU
banks and the history on similar moves have not been very encouraging for PSU
bank’s health. The role of infrastructure NBFC and IIFCL will be crucial for the
growth of the sector. We might see some announcements from large industry
players to form infra NBFCs.

Fortnightly round up of key banking and economic indicators

n While the growth in the non-food credit was at 26.2%, the deposits growth remains lower at 21.4% for the week ended December 05, 2008.

n The incremental CD ratio was higher at 88% for the week ended 05 December 2008, however down from 97.7% in the last month.

n Inflation for the week ended December 06, 2008 falls significantly to 6.84% as compared to 8.0% reported in the last week.

n Call rates firmed during the week and was hovering around upper end of the LAF corridor as the advance tax outflow tightened liquidity.

n Events to watch –India Trade balance & WPI and US GDP.

Fortnightly round up of key banking and economic indicators

n While the growth in the non-food credit was at 26.2%, the deposits growth remains lower at 21.4% for the week ended December 05, 2008.

n The incremental CD ratio was higher at 88% for the week ended 05 December 2008, however down from 97.7% in the last month.

n Inflation for the week ended December 06, 2008 falls significantly to 6.84% as compared to 8.0% reported in the last week.

n Call rates firmed during the week and was hovering around upper end of the LAF corridor as the advance tax outflow tightened liquidity.

n Events to watch –India Trade balance & WPI and US GDP.

SBI, HDFC cut interest rates

Over the weekend many banks have announced reduction in borrowing rates for various classes of borrowers. We believe it’s a good step taken by the banks & strategy to pass on the benefits of easing policy measures.



We expect this week inflation no to be further down by about 40-40 bps over Dec 06 no taking into a/c the effect of cut in Cenvat (excise duty). Thus we believe the RBI will have more opportunity t cut repo, reverse repo rates & CRR. Consequently the banks are expected to cut PLR (prime lending rates) further in next week to fortnight.



Improving monetary conditions & inflation coming under control will help govt to focus on growth & provide impetus to the falling growth. Hence there is a case for another round of stimulus package from the govt. Mkts is expecting that to come some time in the current week. Till that time euphoria is likely to be built in the mkt. However we remain cautious of the efficacy of any such package & their sustaining effect on mkts.



Political risk



Over the weekend we have seen hardening of Indian govt’s stand on engagement with Pakistan. US has also given a kind of tacit acceptance of India’s stand. Officially India is getting ready for any eventuality.



Our take: We are no experts on this matter therefore it is difficult for us to give any view whether we will go for war against Pakistan or not but we surely understand that this could turn out to be a major event risk in next few days. We would advise investors to protect their portfolio by taking any kind of protection for example you may think of buying of puts.



Global cues:



US president has sanctioned an emergency loan of $ 17.4 bn (bailout package) for the beleaguered auto makers in spite of the fact that it was earlier rejected by the US parliament. We believe this package will probably save these companies at the most for a few months. The danger of their impending failure will remain as an overhang. The US mkts reacted muted to this news.

Asian mkts are mixed trading down around 2%. SGX starter the day on a positive note but soon gave all its gain, now trading flat.



Crude showed wild volatility touching a low of $ 33/bbl intraday.



Our Take: Our mkts are witnessing strong undertone on the back of expectations of a second stimulus package & reduction in interest rates. The euphoria in mkts seems to be built to a large extent leading to some kind of consensus. However this is typical of any bear mkt where we should not misunderstand any such rally as trend reversal. Also remember we are just 3 trading sessions away from expiry of Dec F&O. Though the proactive policy from govt will provide support to this rally we believe the upside is capped so remain cautious while trading as per our technical analyst’s views.

SBI, HDFC cut interest rates

Over the weekend many banks have announced reduction in borrowing rates for various classes of borrowers. We believe it’s a good step taken by the banks & strategy to pass on the benefits of easing policy measures.



We expect this week inflation no to be further down by about 40-40 bps over Dec 06 no taking into a/c the effect of cut in Cenvat (excise duty). Thus we believe the RBI will have more opportunity t cut repo, reverse repo rates & CRR. Consequently the banks are expected to cut PLR (prime lending rates) further in next week to fortnight.



Improving monetary conditions & inflation coming under control will help govt to focus on growth & provide impetus to the falling growth. Hence there is a case for another round of stimulus package from the govt. Mkts is expecting that to come some time in the current week. Till that time euphoria is likely to be built in the mkt. However we remain cautious of the efficacy of any such package & their sustaining effect on mkts.



Political risk



Over the weekend we have seen hardening of Indian govt’s stand on engagement with Pakistan. US has also given a kind of tacit acceptance of India’s stand. Officially India is getting ready for any eventuality.



Our take: We are no experts on this matter therefore it is difficult for us to give any view whether we will go for war against Pakistan or not but we surely understand that this could turn out to be a major event risk in next few days. We would advise investors to protect their portfolio by taking any kind of protection for example you may think of buying of puts.



Global cues:



US president has sanctioned an emergency loan of $ 17.4 bn (bailout package) for the beleaguered auto makers in spite of the fact that it was earlier rejected by the US parliament. We believe this package will probably save these companies at the most for a few months. The danger of their impending failure will remain as an overhang. The US mkts reacted muted to this news.

Asian mkts are mixed trading down around 2%. SGX starter the day on a positive note but soon gave all its gain, now trading flat.



Crude showed wild volatility touching a low of $ 33/bbl intraday.



Our Take: Our mkts are witnessing strong undertone on the back of expectations of a second stimulus package & reduction in interest rates. The euphoria in mkts seems to be built to a large extent leading to some kind of consensus. However this is typical of any bear mkt where we should not misunderstand any such rally as trend reversal. Also remember we are just 3 trading sessions away from expiry of Dec F&O. Though the proactive policy from govt will provide support to this rally we believe the upside is capped so remain cautious while trading as per our technical analyst’s views.

The recent Monetary and Fiscal measures announced to boost the economy

Monetary measures

RBI announced monetary measures on 6th Dec (Saturday). RBI cut the policy rates but it kept the Cash Reserve Ratio, External Commercial Borrowing norms and Statutory Liquidity Requirement unchanged. However it reiterated that it wants to keep call rate within the repo and reverse repo rate indicating that liquidity remains the key concern.

Fiscal Stimulus Package

The Govt of India on Sunday (7th Dec) announced Rs 30,700 cr fiscal stimulus package primarily comprising of additional spending and excise duty cuts to boost consumption and to minimize the impact of financial crisis and global slowdown on the Indian economy. The government has proposed to increase plan expenditure by Rs 20,000 cr (0.4% of GDP). The total fiscal deficit comes to 6.4% of GDP (without considering the state deficits). However, considering the current environment, higher fiscal deficit is tolerable as it is an appropriate “counter-cyclical” policy.

The recent Monetary and Fiscal measures announced to boost the economy

Monetary measures

RBI announced monetary measures on 6th Dec (Saturday). RBI cut the policy rates but it kept the Cash Reserve Ratio, External Commercial Borrowing norms and Statutory Liquidity Requirement unchanged. However it reiterated that it wants to keep call rate within the repo and reverse repo rate indicating that liquidity remains the key concern.

Fiscal Stimulus Package

The Govt of India on Sunday (7th Dec) announced Rs 30,700 cr fiscal stimulus package primarily comprising of additional spending and excise duty cuts to boost consumption and to minimize the impact of financial crisis and global slowdown on the Indian economy. The government has proposed to increase plan expenditure by Rs 20,000 cr (0.4% of GDP). The total fiscal deficit comes to 6.4% of GDP (without considering the state deficits). However, considering the current environment, higher fiscal deficit is tolerable as it is an appropriate “counter-cyclical” policy.

Indian Financial Sector Who's Got The Exposure?

Sector loan growth has accelerated to 27.6% YoY as of 7 November, despite slowing economic growth. Though partly driven by higher oil company borrowing, industrial loan growth ex-oil also accelerated to 27.6% YoY (August 2008 data).

Growth in some potentially higher risk segments like real estate, construction, metals, finance companies and credit cards also remains high, and has actually accelerated.

Our recent conversation with banks indicates stress is emerging in exports, driven sectors such as textiles, auto ancillaries, gems & jewellery, commodity sectors, real estate and commercial vehicles.

Bank-wise data shows that BOB, BOI, PNB and SBI have relatively higher export-driven and metals exposure. IOB and Indian have relatively higher real estate/construction exposure, while Canara and Indian have high infrastructure exposure.

Among these stocks, Canara and IOB also have low coverage as well as low Tier I, which is a cause for concern.

In addition, Axis has large non-funded exposure to gems and jewellery segment (~11% of total credit exposure as of March 2008).

Indian Bank and IOB reported large NPLs in real estate portfolio in 2Q. With the recent restructuring guidelines mandating classification of restructured real estate loans as sub-standard, there is clearly a risk of a sharp up-tick in NPLs from this segment in the coming
quarters.

Canara and Indian have relatively high infrastructure exposure, while the SBI group’s exposure to infrastructure is a relatively low 6%, despite its dominating presence in the space. This gives an indication of its balance sheet size and diversity of asset base.

Indian Financial Sector Who's Got The Exposure?

Sector loan growth has accelerated to 27.6% YoY as of 7 November, despite slowing economic growth. Though partly driven by higher oil company borrowing, industrial loan growth ex-oil also accelerated to 27.6% YoY (August 2008 data).

Growth in some potentially higher risk segments like real estate, construction, metals, finance companies and credit cards also remains high, and has actually accelerated.

Our recent conversation with banks indicates stress is emerging in exports, driven sectors such as textiles, auto ancillaries, gems & jewellery, commodity sectors, real estate and commercial vehicles.

Bank-wise data shows that BOB, BOI, PNB and SBI have relatively higher export-driven and metals exposure. IOB and Indian have relatively higher real estate/construction exposure, while Canara and Indian have high infrastructure exposure.

Among these stocks, Canara and IOB also have low coverage as well as low Tier I, which is a cause for concern.

In addition, Axis has large non-funded exposure to gems and jewellery segment (~11% of total credit exposure as of March 2008).

Indian Bank and IOB reported large NPLs in real estate portfolio in 2Q. With the recent restructuring guidelines mandating classification of restructured real estate loans as sub-standard, there is clearly a risk of a sharp up-tick in NPLs from this segment in the coming
quarters.

Canara and Indian have relatively high infrastructure exposure, while the SBI group’s exposure to infrastructure is a relatively low 6%, despite its dominating presence in the space. This gives an indication of its balance sheet size and diversity of asset base.