Saturday, May 22, 2010


— Final direct cost of the crisis for taxpayers may remain below 1% of GDP in most developed countries. This is only a small fraction of original commitments and also much lower than initial gross expenditures.

— Somewhat surprisingly, in historical comparison the crisis may turn out to be one of the least costly on record. Initial outlays already totalled only half the average seen in previous banking crisis resolution schemes in developed countries, primarily thanks to decisive and bold action taken by public authorities and a speedy recovery of the world economy. Recovery rates, too, have not always been as high as in the recent crisis.

— Among the countries most affected by the crisis, direct fiscal costs are in the end unlikely to exceed 2% in the US and 1% in Germany, while banking-sector rescue programmes in France and the UK might possibly even return a net gain.

— Significant cross-country differences result from the diversity in the designs of the stabilisation programmes, participation rates and the timing of the exit from state support.

How do we define fiscal cost?
The fiscal costs of a financial crisis can be broadly divided into two categories: a) direct costs relating to equity injections, debt assumed by the state and asset guarantees as well as (emergency) liquidity support for financial institutions, and b) indirect costs arising from lower tax revenues and higher government spending as a result of a crisis-induced recession, but also including e.g. increased interest costs resulting from higher debt levels (and contingent liabilities). In this briefing, we will mainly focus our analysis on direct costs, excl. support by central banks.

Which banking sectors suffered most in the crisis?
Before turning to the actual analysis, it is useful to look at where the crisis played a significant role. Three different types of country can be distinguished as having been hit especially hard by financial sector losses (see chart 1): a) countries such as the US, UK and Ireland that had experienced a credit boom prior to 2007 and where banks had to face declining asset valuations (resulting in securities write-downs and loan losses); b) countries such as Belgium, the Netherlands, Switzerland and Iceland whose home market was not large enough for their ambitious domestic financial institutions which therefore often built up large exposures to structured products originated in other (mostly ―bubble‖) countries; and c) the special case of Germany where a substantial share of the banking sector had no viable (i.e. sufficiently profitable) business model and Landesbanks in particular engaged in ―credit substitute transactions‖, i.e. buying of securitised loans instead of direct lending.

To read the full report: FISCAL COST


The ILIAD is one of the greatest classics of Greek civilization. The epic poem is attributed to Homer and is passed on to generations through songs and poems. It is a magnum opus which is unrivalled in the world of literature and is an epitome of Western Civilization. It transports you into a world where you inhale all the smells of war, heroism, lust, compassion and humanity. The story of Iliad revolves around the tragic events of Trojan War, leading to the killing of Hektor by Achilleus, that determines the fate of Troy.

The Iliad is a Greek tragedy and is adored by countless generations of people around the world. Why do we like tragedies? What is in it for us to feel immense pleasure from tragedies? Well, this is a difficult question to answer. These Greek tragedies centre around a hero, who is typically a nobleman of royal blood and is a victim of circumstances and who dies at the end of the tragedy. May be, we find pleasure in the fact that we are in less worse position as compared to our tragic icon in the novel. May be, it is simply a case of us finding solace in others’ suffering.

Now, we are dealing with a different kind of tragedy, an economic one in Greece which has plunged the country into a deeper and deeper mess. It is an insolvency trap for Greece; while the Government has been struggling to pull the country out of the fiscal quagmire that is
caused by its own actions and inactions.

What are the causes of the crisis in Greece?

The country is facing a huge sovereign debt problem, which is forecast at 125 per cent of its GDP for the year 2010. Over a period of several years, Greek economy has become less competitive in relation to other Eurozone countries and this has compounded the problems for the country. Its unemployment rate is hovering around 10 per cent. Greece joined the Euro in 2001 and has benefited immensely from it. However, it went on a spending spree and as a result the government debt has mounted. Simply put, it is a case of living beyond one’s means. What has angered the most is the fact that Greece has hidden its debt woes with doctored figures.

Greece's budget deficit is at 12.7%, which is more than four times higher than Euro area rules allow. Eurozone rules stipulate that member countries shall restrict their budget deficit to three per cent of their GDP.

To read the full report: GREEK TRAGEDY

>ICICI Bank to merge Bank of Rajasthan with itself (INDIA INFOLINE)

ICICI Bank to merge Bank of Rajasthan with itself; share swap ratio at 25:118shares.
ICICI Bank has received in-principle board approval to merge the controversial Bank of Rajasthan (BoR) with itself, subject to due diligence and valuations by an independent valuer. With increasing conflict over promoter Tayal’s stake, BoR board too approved the said amalgamation. The bank has been on the watchlist of both SEBI and RBI due to uncertainness over promoter’s stake and string of violations. The share swap deal has been agreed upon at 25 shares of ICICI Bank for each 118 shares of Bank of Rajasthan.

Equity dilution at meager 3.1%; high level of NPL’s remain the key challenge area
While BoR balance sheet size remains limited at Rs173bn (4.8% of ICICI Bank balance sheet), deposit book at Rs152bn and advance book at Rs78bn would constitutes 7.5% and 4.3% of ICICI Bank respectively. The merger in our view, is expected to enable ICICI bank to increase its balance sheet size, which declined by 4% during the period FY09-10. Equity dilution for ICICI Bank, however, is expected to remain at a meager 3.1% as at end FY10 (see table 2). Increasing levels of NPLs for both banks, however, have remained the key concern. Gross NPL for ICICI Bank stood at 4.4%, while that for BoR was at 2.0%. Substantial decline in unsecured portfolio, improvement in asset quality and secured lending would enable the bank to weather through this concern.

Acquisition to expand branch reach, particularly in North India
BoR with 463 branches as at end FY09, constituted ~23% of the branch network for ICICI Bank. With ~60% of these branches located in the state of Rajasthan, the merger would enable ICICI
Bank to increase its foothold in the state and North India. Earlier, while the acquisition of Bank of Madura (2000-01) had enabled ICICI Bank to increase its presence in South India, the merger of Sangli Bank (2006-07) had enabled the bank to mark a strong footprint in West India, particularly Maharashtra. With CASA ratio for BoR at healthy ~40%levels, (in-line with ICICI Bank), the merged entity would continue to focus on garnering low-cost deposits. The acquisition price at ~Rs30.4bn translates into Rs65mn per branch of BoR as against Rs260mn paid by HDFC Bank for acquiring branches of CBoP in February, 2008.

To read the full report: ICICI BANK

>APM Gas Price De-regulation (ANGEL SECURITIES)

The Government of India has approved a hike in the APM gas price sold by ONGC and OIL from nomination blocks from Rs3.20/scm to Rs6.82/scm. Prices are now at US $4.2/mmbtu (pre-royalty adjusted) from US $1.9/mmbtu earlier. After the hike, APM prices are now in line with EGoM-determined gas prices for the KG-D6. APM gas prices were last revised in 2005. The move follows the Finance Ministry's suggestion of bringing about pricing parity between APM and KG gas in one swift move, rather than a phased increase in the APM gas prices as was proposed by the petroleum ministry. The prices will be effective until March, 2014 (FY2014).

In a related development, the cabinet has also approved the marketing margins of US $0.112/mmbtu (Rs200/scm) for GAIL on APM gas marketing volumes. Previous to this, GAIL did not receive any marketing margin on sales of APM gas.

Impact Analysis
We expect ONGC to gain around Rs6,086cr on the Top-line front and Rs4,047cr on the bottom-line front during FY2012E, thus translating into an EPS gain of Rs18.9/share. However, as we were building around a 15% increase in APM gas prices over FY2010-12E, our Top-line and bottom-line for the company stands increased by Rs5,039cr and Rs3,351cr for FY2012E. Thus, we expect an EPS accretion of Rs15.7/share on account of the gas price increase to Rs6.8/scm.

We expect OIL India to gain around Rs941cr on the Top-line front and Rs622cr on the bottom -line front during FY2012E, thus translating into an EPS gain of Rs25.9/share. Given the fact that OIL India's net gas realisations were lower than that of ONGC's APM realisation, it stands to benefit more on account of the increase in the gas prices to US $4.2/mmbtu.

GAIL uses gas for its petrochemical and LPG operations; however, as it was not procuring APM gas, the company is not likely to be impacted by the gas price hike. Yet, we believe that the levy of marketing margins on the APM gas increased GAIL's Top-line and profitability. According to our calculations, GAIL benefits by around Rs344cr on the Top-line front and Rs239cr on the bottom-line front, which translates into an EPS increase of Rs1.9/share (FY2012E), on account of the levy of marketing margins on the APM gas supplies.

To read the full report: APM GAS

>ESCORTS: Galloping along (IDFC SSKI)

Escorts’ transformation is clearly evident in the robust operational performance that each of its business units has been delivering over the last few quarters. Led by improved volume offtake, the earnings of its key agri-machinery division have improved considerably (EBIT of Rs972mn in H1FY10 vs Rs432mn in H1FY09 – a robust growth of 125% YoY). Further, the railway equipment division continues to witness robust volume offtake and the momentum is expected to continue ahead, led by aggressive capex plans (Rs2.5trn over next five years) outlined by the Indian Railways. Also, with a much improved economic outlook (GDP growth expected at 8.1% for FY11) and new model launches, earnings of the construction equipment subsidiary is expected to substantially improve going forward. The auto ancillary division is also on the recovery path with cost cutting measures and development of new spares both for OEMs as well as replacement market. The substantially reduced interest burden (net interest cost of Rs36mn in H1FY10 vs Rs288mn in H1FY09) would further aid earnings growth going forward.

With adequate capacity in place, immense growth potential across businesses, cost-cutting efforts and reduced interest burden, Escorts is expected to witness a sharp delta swing in earnings (estimated EPS at Rs24.1 for FY12 against Rs7.4 for FY09). We believe Escorts would now witness much steady earnings growth led by increasing use of tractors for non-farm applications as well as increased contribution from the non-cyclical businesses including construction equipment and railway equipment. Thus, in our view the Escorts group business model would transform from a cyclical agri-play to a much more stable agri / infrastructure play, which could prompt a re-rating of the stock. On account of the improved earnings visibility across business segments as well as likely outperformance going forward, maintain Outperformer with a revised price target of Rs234.

To read the full report: ESCORTS


To read the full report: BHUSHAN STEEL