Growth Target of 16% - A Challenge for Banking Industry

8/3/2019 Growth Target of 16% - A Challenge for Banking Industry

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A DALMIA RESEARCH CENTRE REPORT

Zeenat Kerawala

(91-22) 3027 2829

[email protected]

Dalmia Securities Private Limited

Fortnightly Banking Update| January 30th , 2012

Indian Banking Round Up

Credit Growth of 16% for banks seems to be unachievable

Key HighlightsAdvance growth of 16% seems to be an daunting target at this point of time Advances has grown by 17.1% YoY during the fortnight ended 13th Jan 2012 as against

23.3% last year, however it contracted sequentially by 0.3% vis--vis 1.2% in 14th Jan 2011.Advances build up growth stood at 10.6% for fortnight ended 13th Jan 2012 vs 14.8% for fort-night ended 14th Jan 2011. Despite Q4 being the busy season we don't see any credit pick up.This is due to the carry forward impact of slowdown in capex by corporate, delay in projects andcurb in government spending. Many banks are finding it difficult to maintain margins and assetquality. The threat of asset quality deterioration led by increasing applications for CDR and freshslippages from agri and retail segment has made banks risk averse.

Deposit base plunged on back of increasing cash with publicBanks Deposits declined by 0.5% QoQ (-Rs.292.1 bn) during the fortnight ended 13th Jan2012. Demand deposits shrunk by 6.2% sequentially to Rs5.99 bn with a build up growth of 6.2%. The growth in aggregate deposits was majorly contributed by term deposits which hasgrown by 18.9% in current fortnight vs 18.1% in previous year. Time deposits recorded mar-ginal growth during the quarter when compared sequentially. This shows that public is keeping

money with themselves rather than investing in banks.

Stable growth in Investments, ID Ratio continuing its past trendInvestments by banks during the current fortnight had grown by 15.6% way above thegrowth of 9.0% for fortnight ended 14th Jan 2010. However the growth remain subduedsequentially with the base having been grown by Rs.1.4 mn. The major growth (~25%qoq) was contributed by the CPs during the fortnight. This shows that the banks are deploy-ing their funds via short term loans to corporate through CP route. The CPs proportionincreased to 1.4% for fortnight ended 13th Jan 2012 vs 1.2% for previous fortnight.

Elevated Money market rates keeping repo window crowdedThere has been a steep rise in the borrowing activities of the bank as witnessed by the dailytrend since the beginning of FY12. This reflects that still the bank is undergoing liquiditypressures. The liquidity in the market as reflected by the net LAF remained above 2.0% ofthe total NDTL way beyond the comfort level of +/- 1% of NDTL. However we have seenthe rates across the counter falling on the back of declining Gsec rates backed by thehopes of expected CRR cut in the coming monetary policy.

Please refer to the important disclosures and analyst certifications at the end of the document

Fortnight ended

Rs bn 13-Jan-12 14-Jan-11 YoY ch 30-Dec-11 FoF ch

Deposits 57987.0 49456.5 17.2 58279.1 -0.5

- Demand Deposits 5991.9 5729.0 4.6 6386.7 -6.2

- Time Deposits 51995.1 43727.5 18.9 51892.4 0.2

Credit 43544.8 37198.9 17.1 43656.4 -0.3

- Food Credit 863.9 639.5 35.1 845.5 2.2- Non Food Credit 42680.8 36559.3 16.7 42811.0 -0.3

Investments 18631.1 16113.1 15.6 18629.8 0.0

- SLR 16896.2 14644.9 15.4 16933.7 -0.2

- Non SLR 1734.9 1468.2 18.2 1696.1 2.3

CD Ratio 75.1 75.2 74.9

ID Ratio 32.1 32.6 32.0

SLR 28.8 29.2 28.7

CRR 6.1 6.2 5.9

Key Policy Rates (%Repo 8.5

CRR 6.0

SLR 24.

WPI (Dec) 7.4

IIP (Nov) 5.9

8 core sectors (Dec) 3.1

HSBC PMI (Dec) 54.

Avg weekly borrowing (Rs bn)27-Jan-12 20-Jan-1Call money 214.4 222CBLO 307.3 275

Market Repo 107.3 98

Repo 1424.8 1523Avg weekly rates (%)27-Jan-12 20-Jan-1Call money 8.99 9.1

CBLO 8.58 8.5Market Repo 8.69 8.7

High deficit and stable policy rates impac

Elevated Gsec yields reduce spread

0.5

0.7

0.9

1.1

1.3

1.5Spread

7.0

7.5

8.0

8.5

9.0

9.510Y Gsec


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15.0

17.0

19.0

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25.0

30.0

32.0

34.0

36.0

38.0

40.0

42.0

44.0 Non food credit (Rs tn) YoY growth (RHS)

BankingFortnightly Report

January 30th, 2012

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Advance growth of 16% seems to be an daunting target at this point of timeAdvances has grown by 17.1% YoY during the fortnight ended 13th Jan 2012 as against 23.3% last year,however it contracted sequentially by 0.3% vis--vis 1.2% in 14th Jan 2011. Advances build up growthstood at 10.6% for fortnight ended 13th Jan 2012 vs 14.8% for fortnight ended 14th Jan 2011. DespiteQ4 being the busy season we don't see any credit pick up. This is due to the carry forward impact of slow-down in capex by corporate, delay in projects and curb in government spending. Many banks are finding itdifficult to maintain margins and asset quality. The threat of asset quality deterioration led by increasing

applications for CDR and fresh slippages from agri and retail segment has made banks risk averse, there bybanks showing reluctance for fresh sanctions affecting the credit outflow. Banks have almost stopped ex-tending credit to sensitive sectors and the growth visible mainly due to draw downs by corporates w.r.t. theearlier commitments made by banks.

The RBIs recent step of 50 bps CRR cut used as a tool to infuse liquidity will console the sector to a limitedextent. However the market borrowings done by the government in order to fulfill its budgetary deficit willsuck high level of liquidity from the system. This will also lead to funds moving towards investments ratherthan supporting business activities which can pressurize borrowing rates further.

Source: RBI, Dalmia Sec

YoY growth givpicture of credvival but sequ

and build up gremain subdued

Since Q4 being the last quarter we might see the banks, in a rush to extend credit to fulfill its priority lendingtargets in order to achieve targets set by RBI. The retail and mortgage segment in rural and semi urban mar-kets will remain the major contributor towards incremental loan book, followed by banks buying securitizedor assignment portfolios to stick to PSL targets. Since the rural markets has not been impacted to the extendthe developed areas, the growth might be grabbed in such markets. The recently revised target of 16% credit

growth still seems to be a challenge. The banks have to disburse almost Rs 2.1 tn in Q4FY12 to achieve16% growth in FY12E. During Q4FY11, the banks had disbursed Rs1.7 bn which is lower by Rs389 bn(22% higher than what was achieved in Q4FY11) than required growth in FY12E.

281.1

185.0

366.0

292.4

428.7

Q4FY0 8 Q4 FY0 9 Q4 FY10 Q4 FY1 1 Q4 FY1 2E

Incremental Advances in each fortnight during Q4 (Rs. bn)

g. Incrementalowth in advancesF has been Rs.1bn. This shows that

quired incrementalowth of Rs.428.7 bnems to be a chal-

nge.

Q4FY12 seems to bring hard-ship for banks to achieve creditgrowth targets. We feel bankswould be able to achieve closeto 15% in FY12E as majorsources for banks to achievegrowth like securitization buyout from MFI, NBFCs and expo-sure to some sectors have beencapped by RBI.


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January 30th, 2012


Stable growth in Investments, ID Ratio continuing its past trendInvestments by banks during the current fortnight had grown by 15.6% way above the growth of 9.0% forfortnight ended 14th Jan 2010. However the growth remain subdued sequentially with the base havingbeen grown by Rs.1.4 mn. The major growth (~25% qoq) was contributed by the CPs during the fort-

night. This shows that the banks are deploying their funds via short term loans to corporate through CProute. The CPs proportion increased to 1.4% for fortnight ended 13th Jan 2012 vs 1.2% for previous fort-night. Overall banks SLR investment stood at 90.5% of total investment portfolio during the fortnight vs90.7% for previous fortnight. Investment Deposit ratio (ID ratio) stood at 32.1% reduced marginally YoYfrom 32.6% during last year. On other hand incremental ID ratio stood at 29.5% for fortnight ended 13thJan 2012 vs 18.8% for fortnight ended 14th Jan 2011.

Break Up of Investments


Deposit base plunged on back of increasing cash with publicDeposits declined by 0.5% QoQ (-Rs.292.1 bn) during the fortnight ended 13th Jan 2012. Demand de-posits shrunk by 6.2% sequentially to 5.99 bn with a build up growth of 6.2%. The growth in aggregatedeposits was majorly contributed by term deposits which has grown by 18.9% in current fortnight vs 18.1%in previous year. Time deposits recorded marginal growth during the quarter when compared sequentially.This shows that public is keeping money with themselves rather than investing in banks.

Credit Deposit ratio (CD ratio) stood at 75.1% for current fortnight vs 74.9% during the previous fortnight.Incremental CD ratio stood at 38.2% during the fortnight as against 63.5% during the fortnight 30th Dec2011. Low incremental deposits indicate low demand for funds from banks and at the same time flow offunds towards investments.

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

44.0

46.0

48.0

50.0

52.0

54.0

56.0

58.0

60.0Deposits (Rs tn) YoY % g rowth (RHS )

9.0

10.

11.

12.

13.

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6 CASA (Rs tn) CASA Ratio (RHS)

90.61 90.70 90.50

0.28 0.20 0.182.25 1.98 2.00

5.03 5.97 5.87

1.83 1.15 1.44

14-Jan-11 30-Dec-11 13-Jan-12

Govt sec Other approved sec Shares Bonds Comm paper


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January 30th, 2012


Elevated Money market rates keeping repo window crowdedThere has been a steep rise in the borrowing activities of the bank as witnessed by the dailytrend since the beginning of FY12. This reflects that still the bank is undergoing liquidity pres-sures. The liquidity in the market as reflected by the net LAF remained above 2.0% of the totalNDTL way beyond the comfort level of +/- 1% of NDTL. However we have seen the ratesacross the counter falling on the back of declining Gsec rates backed by the hopes of ex-

pected CRR cut in the coming monetary policy.Average weekly Inter bank borrowings increased by 4.7% WoW to Rs653 bn for week ended13th Jan 2012 vs Rs623.5 bn for week ended 6th Jan 2012. Average weekly money marketrates stood close to 8.64% for week ended 13th Jan 2012 vs 8.61% for week ended 6th Jan2012. Proportion of banks borrowing from repo window has increased to 67% in week ended13th Jan 2012 vs 59.6% for week ended 6th Jan 2012.


Money supply to improve on back of CRR cutReserve money registered growth of 13% YoY for fortnight ended 13th Jan 2012 on back of

2.3% growth in currency with the public FoF basis. We believe rise in currency with the publicmight be on back of good monsoon leading to better farm yields and government spending.Funds with public have not come to market as it is indicated by fall of 0.5% FoF basis in depos-its. Impact of low growth in reserve money is visible in Money multiplier (MM), as MM camedown to 5.02x in fortnight ended 13th Jan 2012 vs 5.14x for previous fortnight there by impact-ing liquidity in the market. MM is low also on account of higher CRR of 6.1% for fortnight ended13th Jan 2012 vs 5.9% for previous fortnight. Money supply (M3) grew by 16.0% YoY on otherhand it fell 0.1% FoF basis for fortnight ended 13th Jan 2012 mainly on account of lower MM.With RBI reducing CRR by 50bps in its Policy meet as on 24th Jan 2012, we expect M3 to in-crease additionally by approximately 2% FoF basis for coming fortnights.

8.20

8.40

8.60

8.80

0

500

,000

,500

2,000

2,500

29-

Nov-

11

1-Dec-

11

5-Dec-

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2-Jan-1

2

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2

6-Jan-1

2

10-Jan-

12

12-

Jan-

12

16-Jan-

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18-Jan-

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20-

Jan-

12

24-Jan-

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27-

Jan-

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Total borrowings (Rs bn) Interest rates (RHS)

0%

20%

40%

60%

80%

100%

13-

Dec-

11

15-

Dec-

11

19-

Dec-

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29-

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Jan-1

2

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2

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Jan-1

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11-

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12

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25-

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Repo Marke t bor rowings


Increasing boings from due to higheroffered in Mmarket v/s route


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January 30th, 2012


OutlookFinally even RBI has accepted that its initial credit growth target of 18% would not beachieved on back drop of weak economic conditions. RBI has revised banks credit target to16% for FY12E in its policy meet in Jan 2012. Many banks have come up with their Q3FY12results and all have shown low growth in net profit. Main impact on PAT has come from lowmargins and high credit cost in light of corporate book getting restructured and some addi-tional sectors such as steel and textile showing stress along with infrastructure. Banks havereported that there are still many cases in pipeline for CDR approval. Gross NPAs of bankshave shown upward move as agriculture and retail segment is still adding to NPAs. Last yearbanks had made handsome treasury gains. This time this source of income is low as G-sec

yields remain above 8.5% for Q3FY12.Early cool down in inflation is one factor that might bring respite to banks in form of policyrate cuts and higher credit demand. But we remain skeptical on inflation cooling down byFY12 end as non food inflation has remained at high level along with crude putting pressureon fuel inflation.We believe Q4FY12 to still remain tough quarter for banks as asset quality might show nega-tive surprises as many corporate accounts are lined up for restructuring. Any further down-grade in credit growth would be a blow to the industry as a whole. We maintain our cautiousstance on the sector.

Forex reserves remain almost flat WoW basisForex reserves have come down by 2.1% YoY basis for week ended 20th Jan 2012. Majorgrowth was seen in Reserves with IMF growing at 20.3% YoY and gold reserves at 18.5% YoYfor week ended 20th Jan 2012. The contribution to reserves have seen change in gold pro-portion moving up to 9.1% for week ended 20th Jan 2012 vs 7.5% for week ended 21st Jan

2011. Proportion of SDRs has come down to 1.5% for week ended 20th Jan 2012 vs 1.7%for week ended 21st Jan 2011. Reserves in form of foreign currency basket have come downto $259.5 bn for week ended 20th Jan 2012 vs $269.6 bn for week ended 21st Jan 2011.

$ bn 20-Jan-12 13-Jan-12 WoW 21-Jan-11 YoY

Foreign currency assets 259.51 258.80 0.3 269.6 -3.7

Gold 26.62 26.62 0.0 22.5 18.5

SDRs 4.43 4.41 0.4 5.1 -13.6

Reserves With IMF 2.70 2.69 0.4 2.2 20.3

Total 293 293 0.3 299 -2.1Source: RBI, Dalmia Sec


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Analyst CertificationThe research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: Allof the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers andtheir securities; and no part of his or her or their compensation was, is, or will be directly or indirectly related to the specificrecommendations or views expressed in this research report.

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Disclosure Appendix

Institutional Sales Desk

Analyst(s) holding in the Stock : Nil

Rating Criteria

BUY: Returns>15%;ACCUMULATE: 5%

Growth Target of 16% - A Challenge for Banking Industry

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