Tuesday, December 9, 2008

>Indian Banks(Citi Group)

 Asset quality pulls and pressures — India’s economic outlook has continued to
deteriorate, raising further questions on banks' asset quality, given that a)
industrial production growth has slowed sharply; b) corporates face a funding
crunch (especially off-shore); c) credit spreads have moved up (though rates have
started coming off); and d) loan growth has been consistently high (25%+) for 3-4
years. Where could this lead us on asset quality; we seek history as a guide.
 What does history tell us? — a) Still far from peak NPLs (25%, current 2%), and
slippages (6.7%, current 2%); b) deterioration correlates more with IIP than
GDP/loan growth; c)1-3 yr lag between economic slowdown, and NPLs peaking; d)
lending rates matter (peak 19%, current 14%), but impact limited; e) credit costs
are back-ended, they rise even after the economy bottoms; f) stocks underperform
with rising deterioration; appear better correlated to slippages than credit costs.
 Is history relevant? — It always is; but there are caveats: a) Data - limited
availability, distortions (accounting, classification, structural changes); b) BS/P&L
changes -Large bond gains, supporting NPL clean-ups; c) Structural changes -
loan mix, capital and corporate health; d) Starting point – very high base NPLs as
standardized asset quality norms and reporting introduced only in early 1990's.
 History usually repeats itself, but scale and form often vary — We believe asset
quality will hurt; though jury is probably still out on pace and extent of pain. Key
determinants: a) Severity of economic slowdown; b) Scale and timing of domestic
fiscal, monetary actions; c) Global credit and growth environment; and d) Bank
management response to environment; collectively and specifically.

To read full report Indian Banks(Citi Group)

>Reliance Industries(Morgan Stanley)

Quick Comment – What’s New: The Ministry of
Petroleum and Natural Gas released a press note on the
Govt. of India’s decision regarding Pricing and
Commercial Utilization of Natural Gas produced from
NELP blocks. Key highlights of the release are as follows:
1. The First 40mmsmd of gas from the KG-D6 fields
will be supplied to the priority sector at a gas price of
US$4.2/mmbtu (excluding the transportation tariff and
taxes) and will be applicable to all consumers.
2. The pricing of gas is linked to the crude oil (WTI) price
and is capped at US$4.2/mmbtu for a crude oil price of
US$60/bbl or above. The govt. will await the ruling on a
court case for gas pricing and sale of gas to NTPC.
Implications of First 40mmscmd being sold at
US$4.2/mmbtu: Since the GoI has allowed RELI to sell
the first 40mmscmd of gas at US$4.2/mmbtu instead of
US$2.52/mmbtu ( to NTPC and RNRL) as per our
assumptions, the weighted avg. price of gas increases
to US$4.2/mmbtu (from US$2.52) and US$4.0/mmbtu
(from US$2.71) for F09 and F10, respectively.
Implications At Crude Oil Price of US$45/bbl: There
are two impacts if oil is at US$45/bbl: 1) At US$ 45/bbl of
crude oil based on the formula, the gas price, as per
GoIs formula would reduce from US$4.2/mmbtu to
US$4.067/mmbtu; 2) The assumption of MA1 field oil
goes from US$65/bbl to 45/bbl. The impact on RELI’s
EPS, purely due this change in gas pricing is +1%,
+12% and -1% for F09, F10 and F11E, respectively.
The overall impact including the crude oil pricing
would lower earnings by 1% in F09, increase
earnings by 6% by F10 and lower earnings by 6% in
F11E as shown in Exhibit 1. The dollar assumption here
is Rs51; if the dollar fluctuates by Rs1, our EPS changes
by 3.7%.

To read full report Reliance Industries(Morgan Stanley)