Dalal Street

Cash equity volumes are showing no signs of improvement since the bump up in May 2009, driven by the General Election outcome and a global equity rally. In fact, at Rs4,264bn in November 2009, the monthly cash volumes are now back to pre-May levels.

The decline in the overall cash volumes is accompanied by similar trends in Institutional volumes. DII and FII volumes declined by 11.4% MoM and 25.2% MoM, respectively in November 2009.

DII weak volume trend is almost surely an outcome of weak AUM growth of the domestic mutual fund industry and low trading intensity of Insurance players (whose AUMs are still growing). The equity AUMs of the mutual fund industry have grown by 47.3% YTD October end, versus 35.6% rise in the Nifty over the same period, indicating only modest inflows.

We have been positive on the Indian Brokerage sector based on an improvement in all the key revenue segments for the sector. Clearly, for stocks in this sector to now outperform the broader market, improvement in trading activity and corporate fund raising is going to be crucial and will be monitored closely. Edelweiss Capital remains our top pick in this space.

The RBI has instructed banks to provide for 70% of non-performing assets (NPAs) by Sep 2010. More importantly, banks are allowed to include technically written-off loans to calculate the provision coverage ratio (PCR).

Technically written-off accounts are NPAs that are outstanding in the books of banks’ branches, but have been written-off, fully or partially, at the Head Office level. Including these in the gross NPA computation has helped improve banks’ PCR.

Inclusion of technically written-off accounts in the calculation of the PCR is a positive development for large-cap banks like SBI, ICICI and Canara. While SBI’s PCR stands to improve from 43% to 58%, ICICI’s and Canara’s are likely to rise to 65% (51%) and 74% (28%) respectively.