BANKING AND FIANANCE – DERIVATIVES VIEW

K Anant Rao
+91-22-22895196
sales@karvy.com May 16, 2011

RBI Policy – key challenges for the banking sector

Home Loan Rate hike: Hurting players by Size: As reflected in the price correction

The recent RBI policy has led to many challenges for the banking sector. 1) Increase in policy rates to lift the cost of
funds - Pressure on credit growth and NIM’s 2) Higher provisioning coverage at 70% - This will affect PSU banks more
than Pvt. Banks. 3) Higher restructured book 4) Capital rising to be a challenge etc.

SBI sets the trend for the sector – implications for the banking sector
Post the RBI policy, SBI raised deposit and lending rates sharply. SBI has raised its base rate and BPLR by an identical
75bps, the bank also raised non-bulk deposit rates at the very short-end (less than 6 months) by 75-225bps.

Since the RBI's monetary policy, 14 banks have raised their deposit rates while 23 banks have raised their lending rates.
Ex-SBI, banks raised their deposit rates by ~60bps on an average in the very short-term maturity buckets (less than 6
months). The rise by SBI is hard on the system and believe that other banks in the system will now need to match the
rates offered by SBI for the very short-term maturity buckets (less than 6 months) or else they will get mispriced in the
market. The long end is already steep.

What does it means for the banking sector (especially to the home loan lenders):

1. Other banks will feel the need to narrow the spread between the rates they offer on such short-term maturity buckets
and the rates now being offered by SBI. Post SBI's move, the spread has widened by 150bps for the short-term maturity
buckets (less than 6 months). This is negative on NIMs for the entire banking sector.

2. Potential CASA erosion across the system: The 7-day 6.25% deposit, when rolled over continuously for a year, delivers
a yield that is 250bps more than the savings deposit offers (4.0% p.a). This will erode CASA across the banking system.
For a depositor rolling over this short term maturity bucket, is an arbitrage opportunity, and don’t expect CASA to be
sticky for other banks anymore. Given its high CASA ratio, we see SBI will be affected by its own actions and expect CASA
balances from other banks to begin moving towards SBI. This is negative on NIM’s again for the banking system.

The charts of Banking and Finance majors are reflecting the analogy explained above. We decided to test the same
with charts of stocks where the company is having a major exposure to Home loan. 1) State Bank of India 2) HDFC Ltd
3) LIC Housing Finance Ltd and 4) ICICI Bank Ltd. These four combine have a very significant weight age on the total
home loan business in India.

Conclusion:
The recent hike in home loan rates is certainly not the last. We still expect to see some more increase in home loan
rates. Given that “teaser rates” are a thing of past now, the aggression shown by SBI in raising rates for home loan
seems to be hurting major like HDFC and LICHSGFIN and ICICI Bank more than ever.

We are witnessing a trend in the manner banking and financial stocks on the charts are being unwound which reiterates
our stance that rate hike by RBI will impact banks and financial stocks negatively.
First it was SBI which was under the hammer, followed by HDFC and the next could be LICHSGFIN and ICICIBANK in the
line of fire from long only investors who believe that rates haven’t peaked yet and can remain at elevated for a 3-4
quarters.
State Bank of India Weekly Charts

SBIN: The stock had staged a recovery from the lows of 2450 in Jan 2011 to around 2960 in May 2011. However post the
rate hike by RBI, State Bank of India decided to raise rates of home loans and after that we have seen some unwinding of
long positions in the stock and prices have come down to 2650 levels in a matter of 10 days.

Going forward, the stock is expected to take support at near 2450 levels (which is lows for Jan 2011). Will the support
hold or give way to new lows will be decided by the fact whether rates continue at current levels or will borrowing
become more expensive.

HDFC Weekly charts

HDFC: Given that the major business of the company is granting loans for real estate, the decision to hike home loan
rates by India’s largest bank has come in as negative surprise. The charts of HDFC suggest that the prices have been
flirting around the medium term weekly moving averages for quite some time now, but are unable to sustain above it
consistently.
The stock has immediate supports at the 595-610 levels on the weekly charts and some rebound may not be completely
ruled out, but given that home loan rates haven’t exactly peaked out yet, profit booking in the stock should be a good
idea.

LIC Housing Finance Weekly Charts

LIC Housing Finance:

They are large player in the housing loan market in India and rate increase will have an impact similar to HDFC. The
weekly charts of LICHSGFIN suggest that the stock prices are headed south in the short term towards their support areas
of 195-205. Just like HDFC, throw over from the support zone should be an opportunity to unwind longs in the stock if
some one believes that home loan rates are set to rise further thus making the business environment for LICHSGFIN
challenging in the medium term.

ICICI Bank Weekly Charts

ICICI Bank Ltd:

India’s largest private bank too won’t remain unaffected from the interest rate changes that are headed north. The
charts of ICICI Bank suggest that the stock has support at the 940-960 levels in the short term which should be
considered as a stop loss for long positions for the time being. Fresh additions should be considered till the time interest
rates are expected to remain at elevated levels.
 Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%

R. Murali Krishnan
(Head Institutional Equities)
muralikrishnan@karvy.com

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research@karvy.com
Tel: +91-22-22895000

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research report.

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