With the loan-to-deposit ratio at a peak and lending rates close to historical highs, we expect NIMs to decline 10-20bp in FY12 from FY11. We estimate loan growth of 18-20% in FY12-13, driven by 15% nominal GDP growth; however, risks to growth are high. We expect asset quality trends to stabilise in FY12, and a decline in loan loss provisions (LLP) to support earnings growth of 10-20%. We estimate the banking system liquidity deficit will ease from $25billion to $8billion by March end on government spending and RBI open market operations. While we believe short-term rates will fall in the near term, the governments borrowing programme should be a key driver of liquidity/rates in FY12. We lower our price targets 4-8% to incorporate a rising cost of equity (a 25bp higher riskfree rate). We believe stock selection is key. We would be more bullish if inflation fall, or valuations become too attractive to ignore. Our top picks are ICICI Bank, Axis Bank, IndusInd Bank and Shriram Transport Finance; our least-preferred are Bank of India and LIC Housing.
Despite RBI tightening, the banking sector outperformed the broader market by 25% and returned 54% between February and October 2010 on stable margins and growing credit.
We believe the situation is different this time as last year was the first stage of interest rate tightening. Liquidity last time was normal and short-term rates ranged between 5% and 6%, compared with 9%. Inflation was on a downward trend in 2010 whereas now there is uncertainty on inflation which we believe will stay above 7% for most of FY12. Financial 2012 will be the second stage of tightening and may not be so good for margins.
UBS Investment Research