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CRR cut to improve margins by 1-2bps: Emkay - Moneycontrol.com

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Tue, Oct 30, 2012 at 19:02

CRR cut to improve margins by 12bps: Emkay

Emkay Global Financial Services has come out with its report on banking sector. The margin benefits will be restricted to 1-2bps post CRR cut. Home loan interest rates
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Emkay Global Financial Services has come out with its report on banking sector. Policy rates left unchanged repo at 8%; reverse repo / MSF at 7% / 9% resp. CRR reduced by 25bps to 4.25% largely to address liquidity situation CRR reduction to have mere 1-2bps positive impact on margins as we expect excess liquidity to be parked under government securities (25bps * 10-yr Gsec) n Enhanced provisioning on restructured loans (+75bps) to impact our FY13 PBT by 0.1% 4.5%. Disclosure for exposure to credit, derivatives and unhedged foreign currency tightened Banks over the past 1-year have reduced their base rate (by 15-25bps) and deposit rate (by 2540bps) thereby leaving limited room for any further reduction in rates. CRR easing to aid margin improvement by mere 1-2bps: RBI in its secondquarter review of monetary policy today has reduced CRR further by 25bps to 4.25%, lowest since Dec2003. Cumulative CRR has been reduced by 150bps for CY12 against mere 50bps reduction in repo rate. RBI attributed the reason for CRR reduction to addressing the liquidity situation. In its commentary, the central bank hinted that: The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth. It anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter In our view, with fragile credit growth (currently at 15-16% yoy levels), we believe the excess liquidity arising out of the lower CRR requirement will be parked under G-sec. Resultant, margin benefits will be restricted to 1-2bps (25bps * 10-yr Gsec) Banks over the past 1-year have reduced their base rates (by 15-25bps) and deposit rates (by 2540bps) thereby passing on the monetary easing benefits and leaving limited room for any further reduction in rates. Enhanced restructured provisioning to impact our FY13 PBT by 0.1%- 4.5%: Taking cognizance of the risks emanating from the spiraling restructured loans of Indian banks (PSUs in particular) RBI appointed working committee in their report dated 13th Sept2012 had proposed to increase the provisioning requirement on standard restructured assets to 5% in a
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11/6/12

CRR cut to improve margins by 1-2bps: Emkay - Moneycontrol.com

proposed to increase the provisioning requirement on standard restructured assets to 5% in a phased manner (3.5% for the first year and 5% in the second year). However, as a pre-cursor to the same, RBI has raised the provisioning requirement on restructured portfolio by 75bps to 2.75% with immediate effect. This would impact our FY13 PBT by 0.1% - 4.5% with worst hit being : BOI (4.5%), Allahabad Bank (3.4%), Corp Bank (3.3%), PNB (2.9%) etc. (see detailed table below) RBI has also instructed banks to improve their disclosure norms pertaining to their exposure to credit, derivatives and un-hedged foreign currency exposures among themselves and put in place an effective mechanism for information sharing by end- December 2012. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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