Sector Update: Banking

Sector Update: Banking

PSU Banks have set the tone for cuts in both deposit and lending rates since November 2008.

Virtually all PSU Banks have cut their PLRs by 75bp (to 13.25% in most cases), which we believe will largely offset the margin benefits accruing from the steep CRR cuts.

Union Bank and Punjab National Bank (PNB) had cut their PLR by 150bp to 12.5% in December 2008 and most other banks have announced similar cuts effective from January 2009.

Now, PNB has announced further cut in its PLR to 12%, effective 1 January, 2009 taking its PLR to the lowest in the industry.

At the same time, most large banks (including HDFC Bank amongst private banks) have cut their peak fixed deposit card rates by 100bp on account of their competitive advantage in raising cheaper retail deposits, while smaller banks (at the other end of the competitive spectrum) such as Indian Overseas Bank, Corporation Bank and Oriental Bank of Commerce have effected cuts ranging from 0-50bp.

PNB has announced a further sharp cut in its peak deposit rate by 100bp to 8.5% for deposits of one year to less than three years, a key factor in facilitating the PLR cut announced by the Bank.

So far, ICICI Bank had largely kept its interest rates for existing customers unchanged in spite of substantial monetary easing, likely on account of the higher deposit rates that it has to offer to retain/acquire customers.

This was also largely consistent with the Bank’s express strategy to curtail balance sheet growth to realign its deposit and loan mix.

However, following some easing in bulk deposit and CD rates, the Bank has now indicated that it is looking at cutting interest rates in January 2009 for housing and other loan customers.

Falling interest rates are a positive for the Banking sector. We expect domestic banks to continue benefiting from RBI’s Monetary Stimulus to mitigate the GDP slowdown.

We do not expect an increase in NPAs to materially impact Net Worth / Book Value of banks.

Our top picks are HDFC Bank and Axis Bank. Not only do these banks score highly on all competitive parameters such as CASA, fee income and capital adequacy, but also now trade at a significantly lower valuation premium to PSU Banks than in the past.

Amongst PSU Banks (which are well-placed from a cyclical point-of-view), we prefer large caps and our top picks in this space are PNB and Union Bank primarily on account of their strengths in CASA deposits.

Falling G-Sec yields also create opportunities for short-term gains in PSU Banks (Oriental Bank of Commerce and Union Bank have amongst the highest exposure to tradable G-Secs).