>INDIA BANKS (CLSA)

What’s Inside

• Key takeaways- management meeting, interviews, channel checks
• Round up on news flows- regulatory and company-specific
• Banking sector round-up- Credit growth, interest rates and liquidity
• Update on insurance and mutual funds– Flow, market share
• Valuation– Price performance, comparative matrix, P/B band charts
• Take a look!, ‘Banking Calendar’, links to our recent reports

■ Takeaways-management meeting, interview, channel check
A key take away from our management meetings was that banks are not looking to raise lending rates even if RBI raises benchmark rates by 50bps as they have some cushion due to re-pricing of high cost deposits. Another positive takeaway was that while the credit growth in past one year was led by project financing, banks are now seeing pick up in working capital demand also. Retail delinquencies have peaked and banks with greater share of retail loans are expecting sharp fall in slippages in 2H (HDFC Bank’s 3Q results corroborated this). Our recent interactions with branch officer of a mid-sized PSU bank indicates that while banks
may be taking some interest rate risks by offering fixed-rate mortgage loans, they
continue to be highly vigilant about the quality of new borrowers.

■ Banking sector round-up – banks outperform market
Key highlight in past one month was a rebound in credit growth from 11% in Dec- 09 to 13.7% in Jan-10 led by a) disintermediation - banks withdrew investments in mutual funds and directly lent to corporate, b) pick up in disbursements driven by rising demand for working capital credit. Pick-up in credit growth, strong start to the results season (HDFC Bank and Axis) led to the outperformance of banking stocks in past two weeks. Most PSU banks are trading at the higher end of their valuation band and 25-40% premium to their five year average valuations whereas private banks are still trading at a discount.

■ Update on insurance and mutual funds- Nov/ Dec 2009
In spite of positive base effect, during Nov-09 private sector insurance companies reported only 14% YoY growth in APE-based new business premiums (NBP), sector premiums however grew by 22% led by LIC. In Dec-09, AUMs of mutual funds declined by 19% MoM to Rs6.7tn (up 61% YoY) largely due to redemption of debt investments by banks. Since Aug-09 (when RBI banned entry loads), equity schemes of mutual funds have not reported a single month with net inflows in equity schemes; Rs75bn of total net outflows between Aug-Dec 2009.

To read the full report: INDIA BANKS