Banking

Sector Update
Mid-quarter review of Monetary Policy 2010-11

Kashyap Jhaveri ¾ RBI in its mid quarter policy review announced a permanent cut of
kashyap.jhaveri@emkayglobal.com 100bps in SLR to 24% wef Dec 18, and purchase of g-secs worth
+91 22 6612 1249 Rs480bn through OMO over the next one month
¾ SLR cut to result in 3bps improvement in banks’ margins, while OMO
Pradeep Agrawal to infuse liquidity into the system easing short term interest rates
pradeep.agrawal@emkayglobal.com ¾ RBI kept other key policy rate unchanged with Repo at 6.25%,
+91 22 6612 1340 Reverse repo at 5.25% and CRR at 6.0%
¾ Though rate hike on pause for now, inflationary pressures from
domestic demand and higher global commodity prices to continue to
guide the policy actions

SLR cut – Positive for banks’ margins

RBI in its mid quarter monetary policy review announced a 100bps cut in SLR to 24%.
In its earlier measures the RBI has allowed banks to avail of additional liquidity support
under the LAF to the extent of up to 2.0% of their NDTL till January 28, 2011. While the
earlier measures were temporarily, today’s action is permanent in nature as it will inject
liquidity on sustainable basis of the order of 480bn. Moreover, this will have positive
impact on bank’s margins as they now will be able to deploy that 1% of NDTL in higher
yielding advances which earlier they were putting in G-sec where the yield were lower at
around 6-8%. Consequently, this will result in ~3bps improvement in bank’s margins.

OMO auction….to ease liquidity and hence short term rates

RBI announced to conduct Open Market Operation (OMO) auctions for purchase of
government securities for an aggregate amount of Rs480bn over next one month.
(Rs120bn per week starting 24th December, 2010). This measure of RBI will ease
liquidity situation considerably. The liquidity in the system has been tight for quite some
time as net LAF repo amount since November has been on an average in excess of
Rs1.0tn. The tightness in liquidity has been on account of several factors like lower
government spending, advance tax outflow, and flurry of IPO’s during the period. As a
result of this, the short term interest rates has moved up sharply over the last few
months with call money rates remaining consistently above repo rate. However we
believe that, with the Rs480bn flowing back into the system, the liquidity situation will
ease considerably resulting in loosening of short term interest rates.

Inflation continues to remain key addressable

The RBI continued to remain concerned as inflation is significantly above its comfort
level. As the RBI quotes ‘rising domestic input costs for the manufacturing sector
combined with aggregate demand pressures could weigh on domestic inflation. The risk
to the Reserve Bank’s projection of 5.5% inflation by March 2011 is on the upside.’

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 Banking Sector Update

Valuation Table
PER (x) P/ABV (x) RoE (%)
Bank CMP (Rs) Reco TP (Rs) FY11E FY12E FY11E FY12E FY11E FY12E

Allahabad Bank 214 Buy 300 5.6 4.8 1.4 1.1 22.8 22.5
Andhra Bank 149 Buy 210 5.8 4.8 1.3 1.1 25.0 24.3
Axis Bank 1,296 Reduce 1,200 16.0 12.7 2.9 2.5 19.0 20.6
Bank of Baroda 883 Buy 1,160 8.1 6.9 2.1 1.7 23.7 23.3
Bank of India 436 Reduce 450 8.5 7.0 1.7 1.4 17.7 18.5
Canara Bank 642 Reduce 636 6.4 5.4 1.8 1.4 24.8 23.8
Corporation Bank 646 Buy 860 6.2 5.0 1.4 1.1 23.4 23.9
HDFC Bank 2,161 Reduce 2,100 24.7 19.7 4.0 3.4 17.3 18.4
ICICI Bank 1,078 Hold 1,200 24.1 19.9 2.2 2.0 9.3 10.2
Punjab National Bank 1,204 Buy 1,500 8.4 6.7 2.0 1.6 23.0 23.9
South Indian Bank 25 Accumulate 30 9.5 7.2 1.8 1.4 18.9 21.1
State Bank of India 2,696 Reduce 3,000 14.1 11.1 2.7 2.2 17.1 18.8
Union Bank of India 326 Hold 400 8.7 5.9 1.8 1.4 16.9 21.1
United Bank Of India 105 Hold 150 6.4 4.2 1.3 1.0 14.7 19.6
Yes Bank 300 Reduce 300 13.8 9.3 2.8 2.2 21.8 26.2

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Emkay Research 16 December 2010 www.emkayglobal.com

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