2QFY2013 Monetary Policy Review | Banking

October 30, 2012

2QFY2013 Monetary Policy Review

RBI delivers on expected lines, reduces CRR by 25bp
Key highlights
The Reserve Bank of India (RBI) in its Second Quarter Monetary Policy Review for FY2013 reduced the Cash Reserve Ratio (CRR) by 25bp, from 4.50% to 4.25%, in line with market expectations. The RBI maintained its key policy rate the repo rate unchanged at 8.0%. Consequently, the reverse repo rate remains at 7.0% and the marginal standing facility (MSF) rate and bank rate remain unchanged at 9.0%. The statutory liquidity ratio (SLR) stands at 23.0% of banks net demand and time liabilities (NDTL). RBI raise the provisioning requirement for standard restructured advances to 2.75% from 2% earlier

Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com

Bhupali Gursale
022-3935 7800 Ext: 6820 bhupali.gursale@angelbroking.com

Monetary policy guided by liquidity and inflation considerations

The RBI anticipates tightening of liquidity conditions owing to higher festival demand and therefore the reduction in CRR is expected to provide some comfort on the liquidity front. Trimming the CRR by 25bp is expected to inject around `17,500cr of primary liquidity in the banking system effective November 3, 2012. By maintaining the repo rate the RBI has reiterated its stance on inflation management. WPI inflation for the month of September 2012 surged to 7.8% mainly owing to the impact of hike in fuel prices initiated by the government earlier in that month. We believe that the hike in diesel prices and revision in electricity tariff will adversely impact inflation through its pass-through effect on generalized inflation. At the same time, the key change in the tone and stance of this policy is that the RBI has increased the priority of supporting growth in its decision-making criteria for the coming quarters rather than focusing purely on inflation. In fact, the RBI governor has mentioned the possibility of a more accommodative policy stance in 4QFY2013.

Revision in growth and inflation outlook

In its Monetary Policy Review, the RBI for the second time since the beginning of the fiscal year revised its growth projection for FY2013 downwards while the inflation trajectory for the fiscal year has been revised upwards. It revised the GDP growth projection for FY2013 downwards to 5.8% as compared to 6.5% estimated in July 2012 citing increase in risks to global and domestic growth. The downward revision of GDP is along expected lines since deterioration in industrial production and investment activity is likely to affect overall economic prospects. At the same time, inflation projection for FY2013 has been revised upwards to 7.5% from 7.0% estimated earlier. Factors such as rise in global food prices owing to drought conditions, increase in global liquidity flows, increase in rural and urban wages over and above the increase in productivity and sticky core inflation pose a risk to inflationary pressures in the economy.

Please refer to important disclosures at the end of this report

2QFY2013 Monetary Policy Review

Policy Outlook
Through its policy stance, the RBI has reiterated that managing inflation and inflationary expectations remain amongst its top priority. The policy statement also raises concerns over growth and indicates that a material improvement in the current account and fiscal deficit situation will increase headroom for the central bank to ease its policy stance. We maintain our view that in the growth-inflation dynamics, the scale is still tilted in favor of inflation control rather than growth, at least until the next policy review. Post December 2012, we expect the RBI to ease rates by 25bp 50bp.

Exhibit 1: WPI inflation remains elevated

(%) 10 8 6 4 2 0 May-12 Mar-12 Oct-11 Apr-12 Aug-12 Feb-12 Nov-11 Dec-11 Sep-12 8.00 8 7.00 7 6 5 4 Feb-12 Oct-11 Aug-12 Dec-11 Oct-12 Apr-12 Jun-12 4.25 Jan-12 Jun-12 Jul-12 9.9 9.5 7.7 6.9 7.4 7.7 7.5 7.5 7.6 7.5 7.6 7.8

Source: Office of Economic Adviser, Angel Research

Exhibit 2: Hawkish monetary policy stance

(%) 9 Repo rate Reverse Repo rate CRR

Source: RBI, Angel Research

October 30, 2012

2QFY2013 Monetary Policy Review

Exhibit 3: Revision in growth and inflation outlook

(%) 8 7 6 5 4 3 2 FY2013 Monetary policy Source: RBI, Angel Research 1QFY2013 Review 2QFY2013 Review Growth estimate 7.3 6.5 6.5 5.8 7 Inflation estimate 7.5

RBI raises the provisioning requirement for standard restructured advances to 2.75% from 2% earlier
RBI has raised the provisioning requirement for standard restructured advances to 2.75% from 2% earlier. Considering the current experience of most banks of about 25-30% of restructured loans slipping into NPAs and about 50% loss given default, increase in provisioning requirement was imminent and 75bp increase can be seen as a primary step by RBI in the direction of ensuring higher provisioning for standard restructured advances. Earlier its working group had recommended increasing provisioning on standard restructured advances from 2% to 5% in a phased manner over a period of two years. Further, RBI can be expected to clarify regarding upgrading of restructured advances to enable banks to write-back provisions once the account performs satisfactorily over a stipulated period. Higher provisioning on standard restructured advances would impact mid-PSU banks the most, with an average PBT impact for FY2013E of 4.1%. Within the mid PSUs, Central Bank and IOB would be worst affected, as their FY2013E PBT would be lower by 8.8% and 7.7%, respectively owing to their higher outstanding restructuring book. We await clarity from management on their restructured book, as the book is not strictly comparable bank-wise, owing to difference in reporting of restructured advance (account-wise/borrower-wise, sanctioned basis/disbursed basis, total restructured advances /standard restructured advances). Meanwhile, least affected amongst PSU banks would be SBI and BOB, while there would be negligible impact on new private banks and moderate impact in case of old private banks.

October 30, 2012

2QFY2013 Monetary Policy Review

Exhibit 4: Impact of 75bps increase in provisioning requirement on FY2013E PBT and Net worth
Bank CENTBK IOB* SYNBK* UCOBK VIJAYA OBC* ALLBK BOI CRPBK UNBK PNB* BOM# INDBK* UTDBK ANDHBK IDBI CANBK DENABK BOB* FEDBK* SIB* SBI AXSB* ICICIBK* YESBK* HDFCBK* Total PSU - Mid PSU - Large Total PSU Pvt. - new Pvt. - Old Total Pvt. Total Restructured Adv (` cr) 20,686 14,775 9,200 9,200 3,629 11,483 10,727 20,589 8,352 13,521 27,852 3,227 10,349 4,093 6,769 10,886 14,056 4,255 16,680 2,538 1,293 36,904 4,068 4,158 192 695 270,177 116,744 140,489 257,233 9,113 3,831 12,944 Total Advances (` cr) 154,244 150,016 126,781 119,163 59,306 117,821 110,462 264,162 98,546 173,911 294,787 56,060 95,000 62,825 86,612 167,779 225,584 59,642 292,181 36,299 28,156 916,841 172,132 275,076 42,019 231,649 4,417,051 1,296,477 2,335,244 3,631,721 720,875 64,455 785,330 Restructured adv. as % of Total Adv. 13.4 9.8 7.3 7.7 6.1 9.7 9.7 7.8 8.5 7.8 9.4 5.8 10.9 6.5 7.8 6.5 6.2 7.1 5.7 7.0 4.6 4.0 2.4 1.5 0.5 0.3 6.1 9.0 6.0 7.1 1.3 5.9 1.6 FY13E PBT 1,756 1,437 1,623 1,624 675 2,353 2,307 4,579 1,950 3,165 6,541 807 2,616 1,036 1,793 3,000 4,147 1,286 5,909 1,161 687 22,139 7,382 10,992 1,802 9,956 102,723 21,262 49,481 70,743 30,132 1,848 31,980 Impact of additional provisioning as % to FY13E PBT 8.84 7.71 4.25 4.25 4.03 3.66 3.49 3.37 3.21 3.20 3.19 3.00 2.97 2.96 2.83 2.72 2.54 2.48 2.12 1.64 1.41 1.25 0.41 0.28 0.08 0.05 1.97 4.12 2.13 2.73 0.23 1.56 0.30 FY13E Net worth 9,915 11,582 9,233 7,194 4,115 12,477 11,046 22,368 9,424 14,636 29,961 4,194 10,583 4,613 8,481 19,247 23,221 5,018 31,056 6,316 2,839 87,853 26,954 51,498 5,710 35,123 464,656 107,875 228,341 336,216 119,285 9,155 128,440 Impact of additional provisioning as % to FY13E Net worth 1.31 0.82 0.50 0.76 0.54 0.57 0.43 0.59 0.60 0.61 0.63 0.58 0.63 0.50 0.53 0.39 0.26 0.51 0.36 0.24 0.27 0.32 0.09 0.06 0.03 0.02 0.37 0.66 0.41 0.49 0.05 0.25 0.07

Source: Company, Angel Research; Note: total restructured advances and total advances as of *2QFY2013, #FY2012 and balance 1QFY2013; Note: Restructured advances in some cases might not be comparable bank-wise on account of limitation of available information regarding reporting of restructured advances (account-wise/borrower-wise, sanctioned basis/disbursed basis, total restructured advances/standard restructured advances).

October 30, 2012

2QFY2013 Monetary Policy Review

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October 30, 2012

2QFY2013 Monetary Policy Review

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October 30, 2012