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Indian Banking Sector Update Essay

5538 words - 23 pages

ICICI Securities Limited
Industry Report
December 14, 2010
Price movement
14000 11000 8000 5000 Aug-10 Oct-10 Dec-09 Mar-10 May-10 Dec-10 Feb-10 Jul-10 8000 6000 4000 2000

Banking Industry Update Dec ‘10
Taking a breather, negatives surround…
Banking stocks corrected across the board on the PSU banks ‘bribery for loans’ scam, 2G and MFI loans, liquidity concerns and rising G-Sec yields. However, one has to take a call on whether the sector will keep correcting further. We believe the sector will continue to remain under pressure in the near term where stocks may not give a sharp bounce-back but shall remain around these levels until we are able to see a sharp uptick in credit and ...view middle of the document...

0 428.8 115.0 154.1 138.7 396.5 1199.2 2732.4 120.4 321.0 1323.6 129.8 52.6 407.1 2222.4 24.0 293.7 Mkt. Cap (|Crore) 32551 23034 3395 11567 7821 10315 38316 176136 6433 16810 54917 1202 1082 7186 103296 2780 10534 Total Return YTD (%) 75.0 13.5 41.0 23.9 30.6 62.7 35.4 22.1 29.9 23.6 35.1 -11.1 50.9 75.3 31.4 64.6 11.0 1 Month Return (%) -13.8 -17.3 -22.4 -22.4 -18.5 -24.8 -12.3 -15.0 -18.8 -17.6 -14.2 -27.5 -27.7 -16.5 -7.2 -14.9 -20.4

Analyst’s name
Kajal Gandhi kajal.gandhi@icicisecurities.com Viraj Gandhi viraj.gandhi@icicisecurities.com Mani Arora mani.a@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

ICICI Securities Limited
Tight liquidity, rising interest rates: Higher CASA ratio to provide buffer
We have seen interest rates on the deposits side, money markets, etc. inching up at a much faster pace on account of continued liquidity shortfall. Banks remained net borrowers from the RBI of around | 1 lakh crore on an average basis under the LAF window. Advance tax outflows around | 4000-5000 crore should create further pressure. In such a scenario, short-term paper rates are going up and banks with higher CASA and large caps like HDFC Bank, State Bank of India and Bank of Baroda will be able to ride the wave better and protect NIMs.
Exhibit 3: CASA proportion : A comparative study
(%) Public Sector Banks Bank of Baroda Bank of India
With interest rates rising on term deposits, CASA accumulation will again be a bit difficult

FY06 38 42 44 30 40 33 49 48 32 40 25 n/a 55 n/a 11

FY07 33 41 45 25 35 30 46 48 34 40 25 n/a 58 n/a 6

FY08 39 37 39 17 33 28 43 47 35 46 25 n/a 54 n/a 9

FY09 38 32 35 15 30 24 39 42 30 43 24 24 44 24 9

FY10 39 33 36 15 33 25 41 47 32 47 26 22 52 23 11

H1FY11 36 33 39 15 33 25 41 48 33 42 26 21 51 24 10

FY11E 38 34 39 18 33 26 40 46 33 44 27 23 51 23 11

FY12E 40 37 40 21 34 28 40 46 33 43 29 26 49 23 12

Dena bank IDBI Bank IOB OBC PNB SBI Union Bank of India Private Sector Banks Axis Bank Federal Bank Dhanalaxmi Bank HDFC Bank SIB Yes Bank

Source: Company annual reports, ICICIdirect.com Research; n/a- not available

Government deposits lying with the RBI have risen to | 4350 crore (as of November 26, 2010) near its yearly peak mainly on account of advance tax and divestment proceeds, all lying with them. In contrast, government spending has not risen leading to money not flowing back to the system, keeping liquidity tight. The open market purchase of | 12000 crore government bonds on December 15 will reduce the excessive spurt in interest rates on the last day of advance tax.
Exhibit 4: Government deposits with RBI at its yearly peak
50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 -5000

|Crore

Source: Bloomberg, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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ICICI Securities Limited
Currently, the one...

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