Banking NIMs ( S&P proffers its opinion not rating)

An HDFC Bank Branch in Hyderabad
Image via Wikipedia

Rating agencies globally and in the Barney Frank / Chris Dodd shadow seemed to have become more about running ahead of the curve and putting their own house in order coming out with last weeks warnings on the Big4 in banking and warning and degrading the peripherals and Euro /US Treasuries from Moody’s to Fitch. However judging from the timing, S&P is not in a hurry as in the case of the report on Indian Banking, it is diversifying into knowledge based analysis of its coverage of the Indian Banking super sector.

Key Facts according to the S&P Data

3.08 average NIMs ( presumably weighed down by the 70% PSB bank assets) in 2011 ans 2.92 at its peak in 2007. Also an average of 2.7% NPAs expected in FY2012.

A shadow of doubt on the Data

Before tackling the opinion for its repercussions if any on the banking superstructure, and the sectoral performance, the first thing one needs to point out is that public data on banking balance sheets and the restriction of the universe to active banks with more than INR 20000 crores in assets ( $5 bln ) one would find that the NIMs in India were more in line with those in the US in 2007 at 3.4-3.7%.

Also one can see that NPA definitions are likely to be different with S&P and their release to the media like all things rare and beautiful, are short on words and ignorant of their non standing in the arena. Even borokers have been circulating reports on banking NIMs for 3 weeks now , and someone like me could have reported what they are presenting on demand/per mandate, just from public dat.

Also, not to be a persevering niggle in a deserving foot, S&P are already minor fry outside indices and should not have bothered with a big bang sector when they invite being discredited, seeing as they have also not started being proactive about ratings in the region/ even Emerging Markets as a constituency

The take on the future

What S&P have attempted however, would be more creditable in terms of the effort and more analytical insights for your nd my business are possible only if the methodology is shared on the same. Till then, a margin compression of 50-60 bps for the sector can be easily negated by the global players with a 10% share of assets in the country who have trouble maintaining their margins across their smaller branch base; it can be negated by more than 100 bps compressions in SBI that would continue to maintain extra provisions of $250 mln each quarter; it would be negated on the positive side by those like HDFC Bank, YES and Kotak because of increases in their corporate credit offtake even as YES goes out of the way to ramp up deposit rates ( it is ready to take savings rate to 6% and more in line with bank policy) . S&P thus would be happy to take home the result from just ICICI Bank and none else. PSE banks would either follow SBI’s lead in increasing Money market deposit rates to bring equity and grow Deposits to add to the CDR balance, while traditional bank directors would coninue to balance the arguments with the historically low CD Ratios in the Indian Banking System. Even with a size of $2.5 tln in assets Credit deposit ratio in India has been as low as 30% in the 70s just moving to 60% now ( ET op ed of 09/06/2011)

However the NIM compression has likely been not compensated for credit growth as a growth market like India can still deliver 20% credit growth and take the NIM compression to negligible levels. As this is more rudimentary as a rebuttal, you ar einvited to post me for more suave copy.

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