- Cost of capital would go up
- NIMs (Net Interest Margins - Difference between the rate at which Bank lends and the rate at which a bank borrows funds) would go down
- Fresh loans would get expensive - and thus credit growth of the bank would suffer
- To protect margins, Yes Bank may have to think about its 7% interest rates on saving accounts - If lowered, it may lead to some loss of CASA accounts
Last 10 days have been very
active for bond traders, as well for some select scrips on the stock
exchanges. RBI's recent moves to curb rupee volatility and its slide has
suddenly put brakes to the momentum of Bank Nifty which was trading at 11,800
on 15th July. Bank Nifty today closed at 10,465 (-11.3%), only in a matter of
9 sessions. This is it's lowest closing since 13th September 2012 when it
closed at 10,207.8.
The carnage in Bank
Nifty is relatively less in comparison to some of the private sector banks.
Yes Bank, IndusInd and Axis Bank have faced the major brunt as the policy
directly impacted them. SBI, in fact, outperformed Bank Nifty during this
period. And it was expected too.
Banks
|
Private/Public
|
Share
Price
|
Change%
|
|
15th
July 2013
|
26th
July 2013
|
|||
Yes
Bank
|
Private
|
500.35
|
367.1
|
-26.63
|
IndusInd
Bank
|
Private
|
506.35
|
420.15
|
-17.02
|
Axis
Bank
|
Private
|
1308.9
|
1107.5
|
-15.38
|
ICICI
Bank
|
Private
|
1061.05
|
931.55
|
-12.20
|
SBI
|
Public
|
1912.3
|
1765.25
|
-7.68
|
Canara
Bank
|
Public
|
361.1
|
269.3
|
-25.42
|
PNB
|
Public
|
662.2
|
593.9
|
-10.31
|
Central
Bank Of India
|
Public
|
63.95
|
54.85
|
-14.22
|
Canara Bank and
Central Bank of India suffered due to poor quarterly results and the impact
due to RBI policy was not much in these banks.
What RBI did on
16th July, you can read here.
On 24th July 2013,
overall LAF limit of Rs 75,000 Cr. was withdrawn.
However, RBI
reduced the LAF facility per bank to 0.5% of their NDTL (Net Demand and Time
Liabilities) from the earlier 1%. Along with this, it also asked the banks to
maintain an average CRR of 99% with RBI from the earlier minimum of 70%.
These measures were
far more destructive for the fund-starved banks than the earlier ones.
The Cash Reserve
Ratio (CRR) currently stands at 4% which puts current CRR amount at Rs
2,88,000 Cr with the RBI. Now, earlier banks used to maintain about 70% of
their CRR requirements with RBI and probably RBI used to accept this as the
liquidity in the system was quite stretched.
[A measure of
liquidity in the system is the LAF requirements of the banks on day to day
basis. Till May 2013, the average LAF requirements were in the range of Rs
1,17,000 Cr which drastically fell to Rs 25,000 Cr in July first week as banks
enter their lean months in terms of credit growth. Generally, RBI is
comfortable with a LAF requirement of 1% of the overall NTDL of the banks on a
bi-weekly basis. That pegs the comfort level at Rs 65,000 Cr. ]
Now, a change of
29% (70% to 99%) in average CRR requirements would make the banks to deposit
additional 83,520 Cr with RBI and thus will not be available in the system for
use. It's a substantial amount to push the liquidity down.
But why a bank like Yes Bank gets impacted more than others by such a move?
Yes Bank, promoted
by Rana Kapoor, has been doing splendid in its short history so far.
Gross NPA
|
0.2%
|
Net NPA
|
0.01%
|
Net Interest
Margins
|
2.9%
|
Cost Income
Ratio
(was 42.7 for 2008-09) |
38.4
|
These are
industry-beating numbers!
No wonder this
company has made millions for its shareholders in the past 8 years of its
listing. The share prices have jumped as much as 12 times in this time period.
Very few companies can boast of such a track record, especially after having
faced a major crisis in 2008.
Now, such growth
for a bank demands ample funds, cheaper funds and thus sufficient liquidity in
the system. RBI's policy has hit them at their weakest spot probably.
Yes Bank's NDTL stands at Rs 80,000 Cr. Before the policy, LAF used to provide them upto Rs
800 Cr depending upon the overall demand. On top of that, they needed an
average of Rs 1200 Cr to fulfill their day-to-day requirements.
These 1200 Cr
used to come from Call Money Markets. Call Money Markets are the providers of
short term finance repayable on demand, with a maturity period varying from
one day to 14 days at interest rate termed as 'Call Rate'. These are the most
volatile rates in the system and depend purely on demand and supply of funds.
Banks (and
institutions like LIC, NABARD etc) with surplus funds act as lenders to
liquidity starved banks. Average rates
for borrowing money from the money markets have hovered around 10-10.5% during
peak liquidity-crunch periods. On 16th
July, the rates went as high as 17%! With MSF (Marginal Standing Facility)
rates moved up to 10.25% from the earlier 8.25%, the call rates are expected
to go higher with lesser excess funds in the market.
A cut of Rs 400
Cr in LAF and an increase of about Rs 1,000 Cr in CRR requirements (29% of 4%
of 80,000 Cr of NDTL) makes Yes Bank's position quite precarious. But that’s
not all. A large portion of Yes Bank's wholesale funding is in form of
Certificates of Deposits (CDs). Once other banks begin to feel the pinch of
liquidity, these CDs will be redeemed and Yes Bank would need to dwell out
more cash to honor its liabilities. However, not all CDs will be redeemed in a
single go and thus exact figures on this front are not possible at present. In
fact, management said on the day of latest results that the average maturity
period for such CDs are 6-8 months.
Now, this shortfall
of some 2600 Cr. plus (1400+1200 Cr.) will be funded at higher interest rates which will
directly impact Yes Bank's profitability. Some implications are as follows:
For a 15,000 Cr
market cap company, these are daunting figures and that's why the investors
have become jittery about the present valuations of the bank. It lost more
that a quarter of its value in the last 9 sessions.
But the question is
why RBI needed to do this and not the general practice of tackling liquidity
through the change in CRR directly?
First of all,
increasing or decreasing CRR is an indirect signal and thus, impacts liquidity
with a lag. This one does instantly.
Second, and the
more important reason, is the money market games that were being played in the
intra-bank markets. Under LAF, banks were raising money at repo rate of 7.5%
and lending them to the borrowing banks at higher rates (remember, 17%!),
making a clear arbitrage profit of upto 9.5%. A large part of these funds were
also being used to speculate on currency movements. These were putting undue
pressure on rupee at the back of deteriorating Current Account Deficit (CAD)
conditions.
The short term bond
yield curve has gone above the long term bond yield curve, a phenomena called
as "Inverted Yield Curve". Generally, the long term yield curves have higher
yields than the shorter term.
[91-day T-Bills: 11.0031%;
364-day T-Bills: 10.4649%; 1 Year (2019) Bonds: 8.13% as on 26th July 2013]
Inverted Yield
Curve, as Investopedia defines it is,
So, are we in for another economic recession?
Prof. Ganesh Kumar
Nidugala of IIM Indore thinks otherwise.
"This is not necessarily true.
In
our case it is policy induced Yield curve not an outcome of economic
events. As long as the measures are temporary the yield curve should
become normal. Either short end has to revert to old levels or long end will
rise if measures are not withdrawn. Rising long end will create trouble…"
Investment Opportunity: Yes Bank and IndusInd Bank are solid banks operationally. These will bounce back as soon as RBI loosens liquidity. Look to accumulate these stocks at every fall for long term multibagger investments.
