Monday, December 28, 2009

>Why Are Banks Holding So Many Excess Reserves?

The buildup of reserves in the U.S. banking system during the financial crisis has fueled concerns that the Federal Reserve’s policies may have failed to stimulate the fl ow of credit in the economy: banks, it appears, are amassing funds rather than lending them out. However, a careful examination of the balance sheet effects of central bank actions shows that the high level of reserves is simply a by-product of the Fed’s new lending facilities and asset purchase programs. The total quantity of reserves in the banking system refl ects the scale of the Fed’s policy initiatives, but conveys no information about the initiatives’ effects on bank lending or on the economy more broadly.

The quantity of reserves in the U.S. banking system has grown dramatically over the course of the fi nancial crisis. Reserves are funds held by a bank, either as balances on deposit at the Federal Reserve or as cash in the bank’s vault or ATMs, that can be used to meet the bank’s legal reserve requirement. The level of reserves began to rise following the collapse of Lehman Brothers in mid- September 2008, climbing from roughly $45 billion to more than $900 billion by January 2009 (see the chart on page 2). While required reserves—funds that are actually used to fulfi ll a bank’s legal requirement—grew modestly over this period, this increase was dwarfed by the large and unprecedented rise in the additional balances held, or excess reserves.

Some commentators see the surge in excess reserves as a troubling development— evidence that banks are hoarding funds rather than lending them out to households, fi rms, and other banks. Edlin and Jaffee (2009, p. 2), for example, identify the high level of excess reserves as the “problem” behind the continuing credit crunch—or, “if not the problem, one heckuva symptom.” Other observers see the large increase in excess reserves as a sign that many of the steps taken by the Federal Reserve during the crisis have been ineffective. Instead of restoring the fl ow of credit to fi rms and households, they argue, the money the Fed has lent to banks and other fi nancial intermediaries since September 2008 is sitting idle in banks’ reserve accounts.

These views have led to proposals aimed at discouraging banks from holding excess reserves. The proposals include placing a tax on excess reserves (Sumner 2009) or setting a cap on the amount of excess reserves each bank is allowed to hold (Dasgupta 2009). Mankiw (2009) notes that economists in earlier eras also criticized the stockpiling of money during times of fi nancial stress and favored a tax on money holdings to encourage lending. Relating these past issues to the current situation, he remarks that “with banks now holding substantial excess reserves, [this historical] concern about cash hoarding suddenly seems very modern.”

In this edition of Current Issues, we argue that the concerns about high levels of reserves are largely unwarranted. Using a series of simple examples, we show how central bank liquidity
facilities and other credit programs create—essentially as a by-product—a large quantity of reserves. While the level of required reserves may change modestly with changes in bank lending behavior, the vast majority of the newly created reserves will end up being held as excess reserves regardless negligible. This process has clearly not taken place. After presenting our examples, we explain why the money multiplier is inoperative in the current environment, where reserves have increased to unprecedented levels and the Federal Reserve has begun paying interest on those reserves. We also argue that a large increase in the quantity of reserves in the banking system need not be infl ationary, since the central bank can adjust short-term interest rates independently of the level of reserves by changing the interest rate it pays on reserves.

Central Bank Lending: A Simple Example
To clarify how the types of policies implemented by the Federal Reserve over the course of the financial crisis affect individual banks’ balance sheets and the level of reserves in the banking system as a whole, we present a simple example. Consider the balance sheets of two banks, labeled A and B (Exhibit 1). Focus fi rst on the items in black. On the liabilities side of the balance sheet, each bank has started with $10 of capital and has taken in $100 in deposits. On the asset side of the balance sheet, both banks hold reserves and make loans. For simplicity, we assume that the banks are required to hold reserves equaling 10 percent of their deposits, and that each bank holds exactly $10 in reserves.

To read the full report: CURRENT ISSUES

>TELEPEDIA: Indian wireless base touches 500m (PRABHUDAS LILLADHER)

Subscriber net addition strong in November 2009: Subscriber net additions garnered by telcos were highest ever in November 2009, with net additions of ~17.5m subscribers, a growth of 5.4% MoM and 70% YoY.

Tata Teleservices’ (Tata’s) solid performance continues: Tata’s net additions were at 3.3m subscriber in November 2009, up 290% YoY but a dip of 14% MoM. Tata has added ~16.8m subscribers over the last five months post the launch of their GSM services. Mumbai & Maharashtra added 0.46m subscribers or 14% of the overall net additions of Tata for the month of November 2009.

Bharti Airtel’s (Bharti’s) net additions back to ~2.8m mark: Bharti added 2.8m subscribers, up 4% MoM. It had maintained a stable run-rate of ~2.76m subscribers YTD for CY09. Increase in competitive offerings like per second billing and attractive outgoing calling options, has hurt the subscriber market share of Bharti by 160bps YTD.

Reliance Communication’s (RCom’s) net additions jumps to 2.8m: RCom added ~2.8m subscribers (CDMA+GSM), up 33% MoM. It has launched aggressive schemes like pay per call, flat 50paise/min and per second billing which has started resulting in buoyant subscriber net additions.

Vodafone Essar (Vodafone) net additions down to ~2.8m: Vodafone subscriber net additions slowed to 2.8m, after a strong October month where they added 3m subscribers. With this pickup, they have bucked their trend of slower net additions over the last six months. Vodafone, too, has started offering the ‘per second billing’ scheme.

To read the full report: TELECOM SECTOR


Capturing opportunities in growing edible oil market: KS Oils (KSO) is a market leader in the Rs130bn mustard oil market, with 11% market share (FY09). It also has ~30% market share in branded mustard oil segment (current market size of ~Rs39bn) which is expected to grow at ~25% CAGR, going forward. By FY11, the company is expanding its mustard oil crushing capacity by ~3x (of its FY09 capacity). We believe that the multi-product brand portfolio will push KSO to capture the growing branded mustard oil market. Further, KSO is expanding ~4x of its FY09 refined oil capacity by FY11. We believe that a strong market presence in mustard oil, strong brands and rich experience in edible oil industry will help KSO capture the ~Rs600bn refined oil market in India.

Striding towards sustainable growth

Capacity expansion will support growth: KSO is expanding its capacity across segments like crushing, refining and vanaspati by ~3x, ~4x and ~2x (its FY09 capacity), respectively by FY11. We believe that it would support KSO to attain ~40% plus FY09- 12E volume CAGR. We believe that KSO Sales and PAT would grow at FY09-12E CAGR of ~31% and ~33%, respectively. We expect contribution from the sales of high margin branded mustard oil to go up in the future and consequently, increase overall EBITDA margins of the company. However, this growth in the EBITDA margins would be offset by rising contribution of low margin refined oil business to total sales, going forward.

Backward integration through palm plantation: KSO has acquired a land bank of 34000 hectares for palm plantations in Indonesia. This will ensure a steady supply of crude palm oil for its refining business and EBITDA margin is expected to be ~50% once the plant matures in 3-4 years. KSO has further acquired 23,000 hectares in Kalimantan in Indonesia. We have not considered any income from these palm plantations since the income would start accumulating from FY13.

Valuation: Based on one year forward P/E, KSO is trading at a discount to its global as well as domestic peers despite having higher earnings CAGR and higher return ratios (RoE). We are positive on the stock on account of its strong edible oil market presence, its growth potential and discounted valuation. At present, stock is trading at near to lower end of its historical forward P/E band of 8x-14x. Hence, we recommend ‘BUY’ the stock.

To read the full report: K S OILS


In Q2’10, Sterlite Industries Ltd.’s (SIL’s) net sales declined by 7.7% yoy to Rs. 60.9 bn. The Company reported a yoy increase in production of Copper (12.3%) and Zinc/Lead (14%) but Aluminium production was down (29.7%) due to complete ramp down of BALCO plant 1 smelter. EBITDA plunged by 26.3% yoy to Rs. 13.7 bn, primarily on account of a steep decline in nonferrous metal realisations. However, the LME Copper (Cu), Aluminium (Al) and Zinc prices have recovered sharply from the lows of last year, driven by the expected recovery in the global economy and the strong demand from China. Going forward, we continue to hold a positive outlook for the Company, on the back of a sharp recovery in the metal prices. However, we believe the stock is fairly valued at the Current Market Price (CMP) of Rs. 847 and thus we reiterate our Hold rating on the stock.

Economic recovery helps Sterlite post a strong qoq performance

Metal prices to remain stable: The LME Aluminium prices have rallied sharply since February 2009, driven by China's State Reserve Bureau's (SRB's) restocking and an expected recovery in the economy. However, we do not expect further rally in the LME Aluminium prices in the near term, especially with the LME inventory piling up. On the other hand, LME Copper prices have rebounded sharply from the low levels witnessed in December 2008, driven by a strong demand for the metal in China and brighter outlook for the global economy. Although we do not expect any substantial increase in the LME prices from the current levels, we have upwardly revised our base-metals average realisation estimates for the Company following the recent rally in the LME prices. Thus, we expect Cu, Al, and Zinc realisation to be ~USD 5,650 per tonne, ~USD 1,835 per tonne and ~USD 2,000 per tonne, respectively in FY10.

To read the full report: STERLITE INDUSTRIES

Rolta repurchases US $ 15.00 Mn FCCBs taking the total buyback to US $ 53.31 Mn (PRESS NOTE)

MUMBAI, December 24, 2009 – Rolta India Limited is pleased to announce that it has further repurchased US $ 15.0 Million of the outstanding Foreign Currency Convertible Bonds’s ( FCCB’s), of the original issue of Zero Coupon FCCBs of US $ 150 Million due in 2012. The Bonds of the accreted value of US $ 17.8 Million have been repurchased at a discount of 15.25% resulting in a gain of US $ 2.80 Million (approx Rs.13.00 crores).

In June 2009,the company had, through a tender offer, repurchased FCCB’s of the accreted value of US $ 43.67 million at a gross repurchase value of US $ Rs 32.75 million resulting in a gain of US$ 10.92 million ( Rs 53.50 crores). The aggregate accreted value of all repurchase of FCCB’s till date is US $ 61.47 million ( Face Value $ 53.31 million) and total amount paid aggregates US$ 47.75 million resulting in a gain of US $ 13.72 million (approx Rs 66.50 crores) giving an average discount of 22.3% to the accreted value on all buybacks. This gain has been appropriated into P&L and Reserves in the financial statements of the company. The Company has diligently worked to effect these repurchase transactions to not only take advantage of the window of opportunity provided by government regulations, but also to adopt procedures that kept the interest of investors in focus. With this the company has been able to repurchase 35.5% of the initial issue of Bonds and the aggregate principal value of the Bonds remaining outstanding will be US $ 96.69 Million following completion of this repurchase which are due for redemption in June 2012.

About Rolta
Rolta is an Indian multinational organization that has executed projects in over 40 countries. Rolta serves these markets by providing innovative solutions in Enterprise Geospatial Information Solutions (EGIS), Defense & Homeland Security; Enterprise Design & Operations Solutions (EDOS); and Enterprise Information Technology Solutions (EITS). Rolta, through its joint venture with the Shaw Group Inc. USA – Shaw Rolta Ltd. – provides comprehensive Engineering, Procurement and Construction Management (EPCM) services to meet turnkey project requirements of power, oil, gas and petrochemical sectors. Rolta's joint venture with Thales, France – Rolta Thales Ltd., develops and provides state-of-the-art C4ISTAR information systems, Military Communications, Digital Soldier and Vehicle System solutions, covering the entire “sensor to shooter” chain, under transfer of technology from Thales. Rolta, headquartered in Mumbai, employs over 4500 professionals with countrywide infrastructure and international subsidiaries across the globe. The Company has benchmarked its quality processes with the world's best quality standards. Rolta is accredited with the prestigious BSI ISO/IEC 27001:2005 certification, the ultimate benchmark for information security; the BSI ISO/IEC 20000-1:2005 IT Service Management Standard; and the Company has been assessed at Maturity Level 5 of the Capability Maturity Model Integrated CMMI SW version 1.1 in 2006. The Company is now engaged in upgrading to Maturity Level 5 of version 1.2. Forbes Global has ranked Rolta amongst the "Best 200 under a Billion" for four times in six years. Rolta has been included in the S&P Global Challengers ListTM 2008, by Standard & Poor’s. This List identifies 300 mid-size companies worldwide that have shown the highest growth characteristics along dimensions encompassing intrinsic and extrinsic growth. ROLTA was ranked at the #1 position in Human Relations (HR), and at the 3rd position in overall ranking in the 2009 DATAQUEST survey of Best Employers in the IT sector. The Company is listed on the NSE in cash and F&O segment and forms part of CNX IT, NIFTY Midcap 50 and CNX 500 indices. The Company is also listed on BSE 'A' group and forms part of BSE Midcap, BSE 200, BSE 500, BSE IT and BSE TECK indices. The Company's GDR is listed on the Main Board of London Stock Exchange and its FCCB's are listed on the Singapore Stock Exchange.