Mumbai: Economic growth will drive the banking industry in India and policy rates in the country will head south, although the reserves that banks need to maintain with the apex bank will likely stay on the high side, said Citigroup report on banks in the Asia-Pacific region released on Wednesday.
The report added that banks in Indonesia too would benefit from a booming local economy. In its latest policy announcement in October, Reserve Bank of India (RBI) left its rates unchanged but raised the reserves that banks need to keep with it by half a percentage point to 7.5% (of the total deposits of each bank).
In the report, Asia-Pacific Banks 2008 Outlook, the global financial services firm said the primary focus and challenge for RBI is to manage the strong flows of dollar into the country—this has now exceeded $100 billion (Rs3.98 trillion) in the last 12 months.
“This liquidity creation, and resultant inflation and asset bubble creation risk, is a key central bank concern, and we expect it to remain that way over the near to medium term,” Citigroup said. According to it, the excess liquidity would compel RBI to raise banks’ cash reserve ratio further. Banks do not earn any interest on the cash reserve ratio kept with RBI.
Citigroup also expects further restrictions on offshore borrowings and checks on capital control. Since the US Federal Reserve has been paring its policy rates, RBI might also lower some regulated rates to discourage more dollar inflows, the note pointed out. The Fed has cut its policy rate to 4.5% from a peak of 5.25% in two stages since September. Citigroup expects US GDP growth of 2.3% year-on-year in 2008, due to aggressive moves by the Fed that pruned 100 basis points, or 1%, to get the economy through the next two ‘difficult’ quarters.
“While the US faces a slowdown, large domestic economies such as India and Indonesia should be able to sustain their strong investment-led loan growth (with the caveat that Indonesia is slightly more exposed to oil prices and a weaker rupiah),” the report said. The most open Asian economies of Singapore and Hong Kong should also see robust domestic growth, as aggressive Fed easing supports margins and promotes asset-price inflation.
The financial services firm said India, Singapore and Hong Kong should benefit from robust loan growth plus stable and lower rates supporting margins. The growth in Indonesia might be tempered by higher oil prices and inflation concerns. “Malaysia’s growth may hinge on government investment spend. Rate easing is likely over in Thailand. Taiwan is still tightening on inflation worries, while China’s regulators are capping near-term loan growth,” the report noted.
Citigroup said Taiwan and Korea should be preferred over Thailand as the latter’s investment recovery hopes appear less certain, whereas bank reforms and cross-strait opportunities are making Taiwan’s banking scenario stronger. Mortgage deregulation and mergers and acquisition is spiraling the growth in Korea, Citigroup noted.
The research report said the market in India is attributing values to potential listings of the various financial services businesses, which banks have built and nurtured over the years. “…but the year should see crystallization of these values, and this capital raising could well be the focus of the financial space, as also a driver of valuations.”
“For many years in recent history, a combination of fourth-quarter seasonal cheer, prospects of further Fed rate cuts and a little election fever has proved to be an infectious mix for driving strong Asian bank rallies and in particular the performance of high-beta names,” it added.
In its recent research report on Indian banks, global consultancy firm McKinsey & Co. has said Indian banks fared better than their Asian counterparts on parameters like customer satisfaction, IT usage and profitability. According to the McKinsey report, the banks in India achieved the highest growth in the region and have provided high returns to its shareholders over the last few years.