Banking Sector+update 120608

Banking

Research

RBI raises repo rate – neutral for cost of funding

Sector Update

Emkay June 12, 2008

The Reserve Bank of India (RBI) has increased the repo rate by 25bps to 8% with immediate effect.

Kashyap Jhaveri [email protected] +91 22 6612 1249

We would like to point out three things over here:

Pradeep Agrawal [email protected] +91 22 6612 1340

1.

While, the increase in the repo rate will not impact the cost of funding for the banks (during last one year, the RBI has not received no bids under repo window for 75% of the days), Many of the PSU banks may use the occasion to roll back the PLR cut that they did in Q4FY08. We believe this will be a positive for PSU banks.

2.

With major monetary tightening steps (75bps increase in CRR and 25bps increase in repo rate) taken during Q1FY08, the July review of monetary policy may be non-eventful.

3.

We believe that one more round of tightening (after CRR increases) was already in price with the bond yields across the tenures having moved up by 15-20bps. In anticipation of severe monetary tightening, the banking stocks also have seen steep correction and are currently quoting at their four year low valuations which we find very attractive. Our top picks – ICICI Bank, BOI, Axis Bank, HDFC Bank and BOB

Repo window is non-existent now With huge amount of excess liquidity in the system, the repo window has become virtually non-existent over last one year. Through last one year, the banks have resorted to the repo window to borrow money only in 25% of the days. Of those 25% of the days, on two occasions banks resorted to the RBI to borrow money in the fortnight when CRR rate was hiked. We believe that with the liquidity situation remaining comfortable over FY09 driven by accretion to Forex reserves and hence, we do not expect the cost funding for the banks to move up. Repo and Reverse Repo volumes (Rs bn)

Overnight call money rate (%)

1,000 800 600 400 200 0 -200 -400 -600 -800

10.0 9.0 8.0 7.0 6.0

Call money

Reverse repo

Reverse repo

5-Jun-08

8-May-08

10-Apr-08

13-Mar-08

14-Feb-08

17-Jan-08

20-Dec-07

22-Nov-07

25-Oct-07

27-Sep-07

30-Aug-07

2-Aug-07

5-Jul-07

4.0 7-Jun-07

9-Jun-08

12-May-08

14-Apr-08

17-Mar-08

18-Feb-08

21-Jan-08

24-Dec-07

26-Nov-07

29-Oct-07

1-Oct-07

3-Sep-07

6-Aug-07

9-Jul-07

11-Jun-07

5.0

Repo

Repo

Source: RBI, Emkay Research

Emkay Research

12 June 2008

1

BANKING

Sector Update

Liquidity: comfortable, albeit likely to be lower than last year Oil @ USD110/bbl USD bn Current account Trade surplus Export of goods Import of goods Invisibles Services Remittances Capital account Loans inflows Banking capital Foreign investments FDI Portfolio Other foreign capital Net surplus/deficit

FY06 -9.2 -51.8 105.2 157.0 42.7 23.9 24.3 23.4 6.1 1.4 17.2 4.7 12.5 -0.7 14.2

FY07 -9.6 -64.9 127.1 192.0 55.3 32.7 27.4 44.9 21.1 2.1 15.5 8.4 7.1 6.4 35.3

FY08E -14.8 -87.4 160.4 247.9 72.6 41.2 37.7 70.9 29.6 3.1 29.3 14.3 15.0 9.0 56.1

FY09E -26.9 -114.1 190.4 304.5 87.2 51.5 42.2 71.1 31.3 3.8 27.2 19.2 8.0 9.0 44.2

Oil @ USD130/bbl and outflow of USD8bn on portfolio investment FY06 FY07 FY08E FY09E -9.2 -9.6 -14.8 -34.0 -51.8 -64.9 -87.4 -114.1 105.2 127.1 160.4 190.4 157.0 192.0 247.9 304.5 42.7 55.3 72.6 87.2 23.9 32.7 41.2 51.5 24.3 27.4 37.7 42.2 23.4 44.9 70.9 55.1 6.1 21.1 29.6 31.3 1.4 2.1 3.1 3.8 17.2 15.5 29.3 27.2 4.7 8.4 14.3 19.2 12.5 7.1 15.0 -8.0 -0.7 6.4 9.0 9.0 14.2 35.3 56.1 21.1

Source: RBI, Emkay Research

PSU banks may use occasion to raise rates Many of the PSU banks have shown their intentions to raise rates post the announcement of the increase in the repo rate. We believe that these banks would just be using the occasion to roll back the PLR cut which they did in Q4FY08. We believe that this would help them to recoup a part of 10-15bps dip in NIMs which they suffered in Q4FY08.

Hike already in price; valuations at four year low We believe that one more round of monetary tightening after the CRR hike was already in price, with bond yields already having moved up by 10-20bps across the tenures after the monetary policy announcement in April 2008. Bond yields (%) 8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 6.8

10-yr

1-yr

5-Jun-08

8-May-08

10-Apr-08

13-Mar-08

14-Feb-08

17-Jan-08

20-Dec-07

22-Nov-07

25-Oct-07

27-Sep-07

30-Aug-07

2-Aug-07

5-Jul-07

7-Jun-07

6.6

5-yr

Source: Bloomberg, Emkay Research

With major monetary tightening having taken place in Q1FY08, the July review of monetary policy may be non-eventful. Alongside, the valuations for banking stocks have also taken significant beating and in most cases they are quoting at their four year low valuations (see the charts). We find the valuations of the banking stocks very attractive and maintain our positive view. Our top picks – ICICI Bank, Axis Bank, HDFC Bank, BOB and BOI.

Emkay Research

12 June 2008

2

BANKING Allahabad Bank –P/ABV (1-yr forward on rolling basis)

Sector Update Andhra Bank –P/ABV (1-yr forward on rolling basis)

Allahabad Bank PB (X)

Andhra Bank PB (X)

1.6

2.2 2.0

1.4

1.8 1.2

1.6

1.0

1.4 1.2

0.8

1.0

Allahabad Bank PB (X)

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Dec-07

Apr-08 Apr-08

Aug-07

Apr-07

Dec-06

Aug-06

Dec-07

Axis Bank PB (X)

Apr-06

Dec-05

Apr-08

Aug-05

0.6 Apr-05

1.5

Apr-04

0.8 Dec-07

2.0 Aug-07

1.0

Apr-07

2.5

Dec-06

1.2

Aug-06

3.0

Apr-06

1.4

Dec-05

3.5

Aug-05

1.6

Apr-05

4.0

Dec-04

BOB PB (X) 1.8

Aug-04

Axis Bank PB (X)

Dec-04

Aug-06

Bank of Baroda –P/ABV (1-yr forward on rolling basis)

4.5

Aug-04

Apr-06

Andhra Bank PB (X)

Axis Bank –P/ABV (1-yr forward on rolling basis)

Apr-04

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

Apr-04

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

0.8 Apr-04

0.6

BOB PB (X)

Bank of India –P/ABV (1-yr forward on rolling basis)

Canara Bank –P/ABV (1-yr forward on rolling basis)

BOI PB (X)

Canara Bank PB (X) 1.7

2.2 1.5

1.9 1.6

1.3

1.3

1.1

1.0 0.9

0.7

BOI PB (X)

Emkay Research

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

Apr-04

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

0.7 Apr-04

0.4

Canara Bank PB (X)

12 June 2008

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BANKING

Corporation Bank –P/ABV (1-yr forward on rolling basis)

Sector Update

HDFC Bank –P/ABV (1-yr forward on rolling basis)

Corporation Bank PB (X)

HDFC Bank PB (X)

2.2

5.0

2.0

4.5

1.8 1.6

4.0

1.4

3.5

1.2

3.0

1.0

Corporation Bank PB (X)

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

Apr-04

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

2.5 Apr-04

0.8

HDFC Bank PB (X)

ICICI Bank –P/ABV (1-yr forward on rolling basis)

Punjab National Bank –P/ABV (1-yr forward on rolling basis)

ICICI Bank PB (X)

PNB PB (X)

3.2

1.9 1.7

2.8

1.5 2.4

ICICI Bank PB (X)

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Apr-04

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

0.9 Dec-04

1.6 Aug-04

1.1

Apr-04

2.0

Aug-04

1.3

PNB PB (X)

State Bank of India –P/ABV (1-yr forward on rolling basis)

Union Bank of India –P/ABV (1-yr forward on rolling basis)

SBI PB (X)

Union Bank PB (X)

2.7

1.8

2.4

1.6

2.1

1.4

1.8

SBI PB (X)

Emkay Research

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

0.8 Dec-04

0.9 Aug-04

1.0

Apr-04

1.2

Apr-04

1.2

1.5

Union Bank PB (X)

12 June 2008

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BANKING

Sector Update

PER (x) FY09E FY10E

P/ABV (x) FY09E FY10E

P/PPP (x) FY09E FY10E

RoE (%) FY09E FY10E

CMP (Rs)

Reco

Allahabad Bank Andhra Bank

69 67

BUY BUY

3.1 4.3

2.5 3.6

0.6 0.8

0.5 0.7

2.0 2.4

1.7 2.0

17.5 19.3

18.9 20.1

Axis Bank Bank of Baroda Bank of India

704 228 268

BUY BUY BUY

17.6 5.7 5.8

14.8 4.7 4.7

2.6 0.8 1.4

2.2 0.7 1.1

8.4 2.9 3.1

6.8 2.4 2.6

15.9 14.0 24.4

16.6 15.0 24.3

Canara Bank Corp Bank DCB

189 324 57

REDUCE BUY BUY

4.4 6.1 17.4

3.7 4.9 9.2

0.8 1.0 1.2

0.6 0.8 1.1

2.3 3.1 8.6

2.0 2.6 5.7

17.5 16.8 8.2

18.3 18.0 12.3

HDFC Bank ICICI Bank PNB

1,185 742 448

BUY BUY BUY

19.9 15.0 6.5

15.4 11.5 5.5

3.2 1.7 1.1

2.6 1.6 0.9

8.6 8.0 3.0

7.1 6.2 2.6

16.8 11.3 17.4

18.3 13.5 17.8

SBI UBI Yes Bank

1,310 123 137

BUY BUY BUY

11.9 4.8 14.1

10.2 3.9 8.6

1.7 0.9 2.1

1.5 0.8 1.8

5.9 2.6 8.2

5.1 2.1 5.2

12.6 20.1 18.3

13.3 20.3 22.0

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Emkay Research

12 June 2008

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