India Banking Sector Views

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BNP Paribas' Views on the Indian Banking Sector,

Expect credit growth of 20% for FY11 - All the banks expect credit growth to be strong, at around 20% or higher, for FY11. SBI expects loan book growth of 18-20% in FY11, while BOI guided for 25% credit growth in FY11. The smaller private-sector banks like IIB and DCB guided towards 25-30% growth in FY11. The PSU banks are seeing stronger than usual traction for 1QFY11, which is typically a slower quarter for banks. Currently, SME, infrastructure and retail sectors are driving credit demand. We expect 20% loan-book growth for banking system in FY11. Our loan-book growth estimates for SBI, BOI, PNB and IndusInd Bank are 18%, 23%, 25% and 28% respectively.

The public-sector banks expressed concerns about slippages on restructured book for the next two quarters. While SBI expects some relief from the extension of the provision-coverage mandate by a year, BOI guided for a decline in credit cost provision for FY11. For FY11, we estimate LLPs (loan-loss provisions) of  SBI will rise to 120bps (90bps in FY10) and those for BOI will stay flat y-y at 110bps.

Valuation  - We use a three-stage residual income method to value the banking stocks we cover. For SBI our TP of INR2,250.00 comprises INR1,700 for the core bank and INR550 for the subsidiaries. Our TP and implied FY11 P/ABV at current price for the mentioned stocks are: SBI (INR2,250.00, 1.56x), BOI (INR370.00, 1.25x) PNB (INR1,100.00, 1.75x) and IIB (INR200.00, 2.9x).

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Credit Suisse on Indian Banks,

Funding shortages could drive deposit rates up in coming months.

Banks are suddenly borrowing Rs650 bn-plus from the RBI’s overnight lending facility (LAF) of late versus excess Rs400 bnplus that they were depositing before mid-May. The liquidity reversal of Rs1 tn in such a short span is significant but easy to explain. While the LAF balances could improve again
after a while, they may deteriorate once again into the year-end.

Even if the RBI continues to provide the liquidity needed by banks at the overnight window, banks are dealing with a fast-worsening duration mismatch in their balance sheets. In other words, the lend-long-borrow-short practice that was worsening with an increasing reliance on CASA is now reaching another extreme

This has been progressively changing in 2010 despite the headline fall in government borrowing demand. Average daily liquidity surplus had fallen to around Rs500 bn in this quarter until mid-May, and it plunged to negative Rs676 bn as of yesterday.

The reasons behind the fall are easy to see. The reserve rate hike sucked out Rs100 bn but the rest of the fall has been due to banks’ lending for the funding of 3G licence fee as well as investments in bond auctions. The government perhaps deposited the money it collected with the RBI, which at aggregate caused a massive shortterm fund shortage for commercial banks and this is reflected in the LAF balance.

The predominance of short-term funding, including CASA, has helped banks’ margins so far, but we believe the situation is fast turning unsustainable. We would expect banks to increase efforts in securing long-term funding, which would not only mean possibly higher deposit rates but also plans of capital raising and external borrowings. Despite banks’ pricing power, we would recommend investors to stay MARKET WEIGHT on banks with preference for banks with strong branch networks in this environment.