Valuations look attractive despite global and macro-economic headwinds.
Indian banks ran out of favour in the last couple of months, as concerns over the country’s high fiscal deficit and inflation increased on higher crude prices. Investors feared crowding out of private borrowers by the government, which would enhance its borrowing to fund the ever-widening fiscal deficit. While the government crowding out private borrowers is one fear, the liquidity situation came under additional pressure in the third quarter as credit growth outpaced the deposit growth of most banks. Consequently, the central bank read the riot act to banks, forcing them to increase deposit rates in order to augment deposit growth from 15 per cent in October 2010. All these measures seem to have had the required impact on the sector as liquidity improved and is expected to get better in April.
Recent data shows the loan growth for the sector (as on 25 February) continues to be 23.3 per cent year-on-year and deposit growth stands at 16.5 per cent y-o-y, compared to 15 per cent in October. This is mainly due to the 300 basis points across-the-board increase in deposit rates.
According to BNP Paribas Corporate and Investment Banking report, the deficit in the Liquidity Adjustment Facility window, which had peaked at 3.5 per cent of net deposits in December 2010, declined to 1.4 per cent of net deposits in early February 2011. This deficit has further narrowed to one per cent in the first week of March. However, advance tax payments have widened the deficit by around Rs 50,000 crore over the last few days, the report adds.
While these may be the positives for the financials, concerns over high crude prices, inflation and higher credit demand in FY12 remain the negatives. If crude prices persist an upward journey, the outlook for the sector may turn negative again, as the government’s fiscal target for FY12 may go for a toss in that case. This is because it’s widely believed that the government borrowing figures for FY12 may be understated and in case the deficit is higher, then increased government borrowing could crowd out private sector.
According to a report on Indian financials by Deutsche Bank Global Markets Research, banks can deliver a 19.7 per cent credit growth in FY12 without overly stretching themselves, assuming 18 per cent deposit growth and 4.6 per cent fiscal deficit. However, if genuine credit demand is higher than 19 per cent then private borrowing may get crowded out. Despite concerns, what makes the sector most attractive are the valuations of some banks.
