Monthly Technicals - Dec 1 2008
Sunday, November 30, 2008
Auto and home loan seekers can expect further cut in the lending rates with the public sector banks gearing up for the second round of cut in the benchmark lending rates by up to 50 basis points during December.
Banks have already started reducing the deposit rates and with more liquidity infusion by the Reserve Bank there would be more scope for cutting lending rates to spur demand, said a senior banker.
Banks have started assessing asset liability situation in the light of the cuts in deposit rate coming into effect from next week, he said.
Another senior banker said, further cut in Benchmark Prime Lending Rate (BPLR) in between 25-50 basis points by various banks is likely to be announced in December.
In the first round, several public sector banks have reduced their BPLR by 75 basis points following an appeal by the Finance Minister P Chidambaram earlier in the month.
Chidambaram had said lowering of lending rates by the state-owned banks would also put competitive pressure on their private sector counterparts to announce similar cuts.
"Competition from public sector banks will force private sector banks to reduce their lending rates sooner than later. It will happen sooner than later," Chidambaram had said.
Taking the lead, country's second largest lender Punjab National Bank has already decided to reduce BPLR by 100 basis points to 12.5 per cent, which would automatically reduce PLR-linked loans by the same margin.
The revised BPLR will be applicable to all existing and new accounts, PNB said, adding, the decision to reduce rate was taken "in response to monetary measures taken by RBI in November such as reduction of repo rate from 8 to 7.5 per cent, CRR (Cash Reserve Ratio) from 6 to 5.5 per cent and SLR (Statutory Liquidity Ratio) from 25 to 24 per cent."
The first round of lending rate cut by Punjab National Bank came into effect during the first week of November.
The BPLR was then revised downward by 50 basis points to 13.5 per cent.
Currently, most of the banks have BPLR around 13 per cent.
The reduction of interest rates by the PSU banks follows a number of steps taken by the RBI to inject into the banking system Rs 2,70,000 crore since October and cuts in the short-term (repo) rates, signaling soft interest rate regime.
Investors looking for a large-cap stock which will add value to their portfolio can consider accumulating the State Bank of India stock in declines. Beaten down valuations, strong financials in an extremely challenging macro environment, with sustainable growth in advances, make the bank stock attractive.
At the current market price of Rs 1086, the stock trades at a modest trailing 12-month PEM of 8.5, at 1.4 times its March book value, without assuming any value for subsidiaries.
Though the bank trades at a premium to all public sector banks, this appears justified given the size of its balance-sheet and the huge market share, despite which it has delivered better financial performance than its peers. Market share for the bank has improved in recent quarters.
A high proportion of low-cost deposits, a corporate loan focus, scope for merger gains from consolidation and strong ‘other income’ growth are key triggers to earnings growth over the next few quarters. The bank has a return on equity (ROE) of 16.75 per cent and ROA of 1.01 per cent for FY-08 and is expected to maintain these this year.
The net profit of SBI (standalone) has grown at 16.7 per cent, compounded annually in the last five years. In the first half of FY-09, it reported a 28 per cent net profit growth.
The growth in profits can be attributed to strong advances growth of 31 per cent in a year which, in turn, helped net interest income growth of 29 per cent.
Advance growth was driven mainly by growth in advances to corporates and SMEs.
Though the bank hiked its PLR by 75 bps at the start of the September quarter, it managed to improve its market share in advances from 15.61 per cent to 16.01 per cent sequentially.
The PLR hike helped improve the net interest margins (3.16 per cent) both quarter-on-quarter and over the last year. A high proportion of low-cost deposits (40 per cent) helped in containing the cost of funds.
In the first half of the fiscal, non-interest income growth of 49 per cent was helped by growth in core fee income. Fee-income growth can be partly due to the increase in processing fee for various products. The bank’s operating expenses have grown marginally by 13 per cent due to staff costs and employee provisions.
Operating profits of the bank increased by 60 per cent y-o-y but the growth couldn’t be translated into net profit growth due to higher provisioning requirements for bond depreciation and provisions for NPA (Rs 911 crore). However, there might be write-backs in the bond portfolio in the coming quarters, on the back of falling yields.
Gross NPA/advances of the bank have come down from 3.07 per cent to 2.51 per cent in a year but is still high compared to most of its peers. The provisioning coverage of the bank at 47 per cent is among the lowest and may make it more vulnerable to any deterioration in asset quality.
The merger with State Bank of Saurashtra in the current fiscal has come with lot of opposition, which affected the day-to-day operations of the banks. SBI has to provide for Rs 370 crore as a past service liability with respect to provident fund and pension liabilities for the merging operations.
The bank is expected to merge six other associate banks (such as State Bank of Hyderabad, State Bank of Patiala and Indore), after a review of this merger. The associate banks posted a net profit of Rs 978 crore, about 30 per cent of SBI’s standalone profits, and have scope for improving margins on the back of better efficiencies.
SBI lowered its PLR in November, following the rate cut and other liquidity-easing measures by the RBI. That the deposit rate cut is lower than the lending rate cut may put pressure on net interest margin in coming quarters. But the spreads between lending rates between PSU banks and private banks are now so high that PSU banks may continue to sustain stronger advances growth. Such a shift is already noticeable with retail advances.
While private banks have been going slow on these advances, PSBs have seized the opportunity to lend aggressively.
SBI has 10,764 branches; the bank plans to open another 1,000 branches in FY-09. That may aid the banks’ efforts to attract low-cost deposits. With more than 98 per cent of branches of SBI CBS-enabled, processing times may also fall drastically.
Fee income avenues such as cross-selling of products are largely untapped for SBI and the potential to grow is, therefore, high.
Right now, the bank’s ‘other income’ is only 30 per cent of the net revenues (as much as 50 per cent for private banks). Over the long term, listing of the insurance business may also unlock value for the bank. Of the advances, 80 per cent is are un-rated, which earlier attracted a 150 per cent risk-weight, but now attract only a 100 per cent weight.
This will temporarily help in improving the capital adequacy ratio of the bank. The bank intends to get these un-rated accounts rated in the near future.
The lowering of standard advances provisioning to 0.4 per cent of total assets, may also see reduced provisioning in future.
Risks to earnings
Employee costs are set to increase as the bank plans to recruit 25,000 people this fiscal.
Slippages in asset quality and a relatively low capital adequacy ratio (11.51 per cent) are concerns which the bank has to address in the coming quarters.
The loss incurred in the card business and retail portfolio can aggravate, if tough macro conditions persist.