Banking: Week in review - NRE Deposit rates hiked - BRICS Research

In a week characterised by light trading amidst the holiday season, global markets were generally calm. Indian markets were weak — concerns about weak policy making and rapidly declining growth expectations continue to weigh on sentiment, and are likely to take a while to play out. Given ongoing concerns, it will be tough for FII flows to pick up meaningfully any time soon. Also, with the US economic outlook steadily gaining momentum, we expect asset allocation to shift incrementally to that market in 2012.

Global markets remained relatively calm, partly because of holidays. Despite solid demand for 1-year Italian paper at a sharply lower yield of 3.5%, longer term yields (10-year) remained stubbornly high. CDS spreads across several troubled economies in the Euro-zone continued flat to slightly down (Exhibit 17). However, the calm may not sustain as the Euro debt troubles are by no means resolved and Euro-zone recession fears seem to be gaining ground. Economic data from the US suggests that the world's largest economy is in better shape than other developed ones and remains one of the few positive data points as we move in to 2012.

Bank stocks…continue to drift lower: Bank Nifty Index closed the week down 4.0% at 7,969 (+1.5% last week, -32.4% YTD). Broader market Nifty Index also closed the week down 1.9% at 4,624 (+1.3% last week, -24.6%). The top-three bank stocks in our universe last week were City Union Bank (+3.3%), Canara Bank (+0.6%) and KarurVysya Bank (+0.4%), while the bottom three were Central Bank (-10.7%), Oriental Bank of Commerce (-10.0%) and Bank of India (-9.0%). FII flows were positive US$66mn against an outflow of US$209mn a week ago. In the near-term, their earnings should give some indication of whether the selloff in bank stock is overdone. That said, several headwinds remain — lack of policy initiatives to spur growth, possible increase in delinquencies related to agriculture despite good monsoon, partly because of election-year compulsions that could resulting in loan waivers.

Inflation could provide some comfort. Food inflation was once again down sharply to the lowest level in 6 years, 0.42% vs. 1.81% during the previous week. Given the sharp decline, we see expectations of a reversal of monetary policy tightening to rise in the coming weeks.

Base rate headed lower? Signaling its belief that interest rates have peaked, Union Bank last week took the first step by making a mostly symbolic 10bps decrease in its base rate. While this also reflects the lack of demand for loans, we expect banks in general to remain circumspect in the current environment. Stabilisation of asset quality would be a more important in providing the right motivation to boost credit growth, in our opinion.

NRE rates spike. Several banks have raised NRE deposit rates over the last couple of weeks since RBI deregulated the rates. While this adds additional headwinds related to the operating fundamentals of banks, the impact on individual banks would be driven by the proportion of NRE deposits as a proportion of total funding base.

FII flows were positive: The week saw net FII inflows of US$66mn (vs. outflow of US$209mn last week). Cumulative flows for 2011 were a positive US$49.39mn for the full year 2011.

Borrowing under LAF remains elevated: In the last week, borrowing under LAF was Rs1,212bn vs. Rs1,667bn, Rs1,011bn and Rs910bn in the previous three weeks. RBI stated in its mid-quarter policy that there is no strain in the money market although given rising borrowings under LAF, it would conduct OMOs as needed. Recently, with liquidity tightening, RBI eased banks' ability to borrow under the MSF facility using excess SLR, and has purchased government securities worth Rs81.09bn and Rs87.90bn in OMOs in the last two weeks. RBI's comfort zone remains +/-1% of NDTL, which is roughly Rs50bn. Average daily borrowings were Rs522bn in September, Rs508bn in October and much higher at Rs925bn in November 2011.

Source : Equity Bulls

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