Author Topic: Will Indian Banks Get Out of the Woods ?  (Read 2007 times)

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Will Indian Banks Get Out of the Woods ?
« on: March 26, 2014, 10:04:48 AM »
Investors are asking five questions: 1) How is interest rate cycle different this time around compared with in 2009-10? 2) Why are
asset quality issues sticky in this cycle? 3) How much GDP growth is required for upside from current valuations? 4) What happens if India gets a weak coalition government? 5) Why are stocks that did well last time not necessarily the best choices this time?

RBI policy rates were at the bottom in May 2009 (Repo rate at 4.75%) and remained low all through FY10. This time, the level of rates is high, at 8-9%, and the Reserve Bank of India (RBI) is increasingly focussing on consumer inflation (and not on wholesale as earlier), which delays the prospects of easing in the near term. As per UBS economist Edward Teather, any easing is most likely post September 2014. However, wholesale rates could decline from April onwards as seasonal demand for funds subsides and the incremental loan-to-deposit ratio falls further, in our view

This credit cycle is driven by domestic policy issues, over-leveraged corporates, and stretched working capital. The starting point of this asset quality cycle is worse than that in 2009-10 due to a high base of impaired loans and sticky issues that could take longer to resolve, in our view. While we expect asset quality deterioration to slow in FY15, a weak government could delay the recovery process and in that case impaired loan formation could be 550bps in FY15

Stick to High Quality Private Sector Banks and Bank of Baroda in the PSU Space.