Union Budget 2010–11 has delivered a wealth of positive news for the banking industry in the form of lower market borrowings by the government in FY11, phased reduction in fiscal deficit, additional capital infusion into state-owned banks, fresh banking licences and extension of the loan repayment deadline under the agri-debt relief scheme.
Considering the positive effect of the Budget and operational metrics, we maintain our preference for Bank of Baroda (BoB), Punjab National Bank (PNB), Oriental Bank of Commerce (OBC), Axis Bank Ltd and ICICI Bank Ltd.
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Budget 2010 lays out a clear road map for narrowing the country’s fiscal gap, with a target of 5.5% for FY11, 4.8% for FY12 and 4.1% for FY13. Lower net market borrowings of Rs3.45 trillion by the government for FY11 versus expectations of Rs3.7–3.8 trillion will alleviate the pressure on long-term yields—a positive for interest-rate sensitive sectors.
Various budgetary measures are believed to be inflationary, including the hike in crude prices, increase in indirect taxes and the thrust on consumption. We, therefore, anticipate monetary tightening by the Reserve Bank of India (RBI) sooner than later. With lower government borrowing and a firmer grip on fiscal deficit, we see a potential flattening of the yield curve as rates of short-term securities would increase at a faster rate compared with long-dated securities.
The government has raised the amount allocated towards augmenting tier I capital of state-owned banks to Rs16,500 crore. It has already infused Rs1,900 crore so far in FY10 and will pump in an additional sum of Rs1,200 crore till the end of March. Immediate beneficiaries of the increased allocation include Dena Bank, Vijaya Bank, Bank of Maharashtra and IDBI Bank Ltd.
The agriculture loan waiver scheme for large farmers has been extended by six months to 30 June. In our view, this will only provide temporary relief, delaying (but not eliminating) the need to classify problem loans as non-performing assets by another six months. In the short term, the extension will have a positive effect on PNB, BoB and OBC.
The government has indicated that RBI will issue fresh banking licences to private firms and non-banking finance corporations.
Overall, we rate the Budget as positive for the banking sector. While the effect of marked to market losses (on account of rising inflationary pressure and consequent increase in short-term securities) is already built into stock prices, the decline in government borrowings is a long-term positive. With the uncertainty over the Budget behind us, we believe asset quality is now a key factor to watch. On the whole, we maintain our preference for BoB, PNB, OBC, Axis Bank and ICICI Bank.
Graphic by Yogesh Kumar/Mint