Indian Banks

Indian Overseas Bank (IOB) reported a 73.81 per cent drop in net profit for the quarter ended December 31, 2009, to Rs 101.7 crore as compared with Rs 388.44 crore during the same period last year.

Total income dropped 11.74 per cent during the third quarter to Rs 2,828.65 crore from Rs 3,204.90 crore, a year ago.

The bank attributed the drop to increase in non performing assets, provisions for wage arrears and decline in treasury income.

“The treasury income came down by Rs 365 crore to Rs 17 crore during the third quarter from Rs 382 crore, a year ago,” said SA Bhat, chairman and managing director .

It made a provision of around Rs 130 crore towards arrears and wages. Net NPA increased to Rs 1,690 crore from Rs 920 crore as on December 31, 2008.

Bhat said the bank was planning to use the Sarfaesi Act to sell some of the assets. “We hope to recover 15-20 per cent of the NPA by selling some of the assets to Asset Reconstruction Company (Arcil) and to other asset reconstruction companies.”

IOB is looking to strengthen other fee-based income. “Our immediate focus will be on life insurance,” he said, adding last year the income through life insurance was around Rs 15-20 crore, which will be increased to Rs 75 crore. It has decided to look at long term policy, which will bring more income.

The other areas, which the bank is looking at are non-life insurance and mutual fund.

“We had set a target to grow at 20 per cent during the current fiscal, compared with the last fiscal, but now expect to grow only 15-16 per cent,” said Bhat.

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The Reserve Bank of India (RBI) surprised the market by raising the cash reserve ratio (CRR) by 75 basis points. “We were expecting a hike of 50 basis points,” said Nilesh Shah, chief executive, ICICI Prudential Mutual Fund.

Though the CRR hike is going to suck out Rs 36,000 crore from the system, market experts say interest rates may not rise immediately. However, there is worry that the rise will coincide with mid-March outflows due to tax payments, resulting in some pressure on interest rates.

Lakshmi Iyer, head, fixed income and products, Kotak Mahindra AMC, said: “The real impact will be felt only in March because the second CRR hike, effective in February-end, coupled with advance tax outflows in March, will neutralise the liquidity in the system.”

For investors in debt funds, investing in the short end of the curve will be ideal. “Debt fund investors should look at short-term bond funds because these will get re-priced,” said A Balasubramaniam, chief executive, Birla Sun Life Mutual Fund. Short-term bond funds invest in paper with average maturity of one-two years. They are at present giving 6-6.5 per cent returns.

Experts say the shorter end of the yield curve is expected to move faster than the longer end before settling in a range. Therefore, debt funds sitting on cash till now will deploy cash at a slightly higher rate, leading to a rise in short-term rates. Ramanathan K, head, fixed income, ING Investment Management, said: “Short-term debt funds of three- and six-month tenures may move up by 25-50 basis points closer to March.”

For investors looking at fixed deposits or company deposits, Shah said waiting till March would be a good idea. “The government’s borrowing programme will have a bigger impact on interest rates,” he added.

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The bond market sprung a surprise with only a marginal rise in yields on a day when the Reserve Bank of India raised the cash reserve ratio by 75 basis points (bps) to suck out excess liquidity in the system.

RBI kept policy rates (repo and reverse repo rates) unchanged. The CRR hike was 25 basis points higher than what the market had estimated. CRR will be 5.75 per cent by the end of February 2010. The effect of the rise will be spread over a month.

The current bonds yields have already factored in an upward revision in inflation estimate to over 8 per cent.

The yield on the benchmark 10-year paper (6.35 per cent 2020) closed at 7.58 per cent today as against 7.55 per cent yesterday, according Negotiated Dealing System (NDS) data.

It is rare for the bond yield on the benchmark paper to move just 3-4 basis points in response to the policy review. There was a surprise element (CRR hike), said J Moses Harding, executive vice-president with IndusInd Bank.

Yields have eased in the second fortnight of January 2010 after remaining elevated, often crossing the 7.75 per mark. A senior treasury official with State Bank of India said the yields would remain range-bound unless RBI announced some tough action to manage inflationary expectations.

Call rates remain steady despite CRR hike
The interest rates in inter-bank overnight lending market remained steady on ample liquidity in the system.

The call money rate ended unchanged around 3.25 per cent, as liquidity enabled banks to raise funds at the lower end of the interest rate corridor, dealers said.

The CRR hike will be implemented in two stages. A first rise of 50 bps will be effective from the middle of next month and the second rise of 25 bps will be operational from the end of the next month. The decision will take out Rs 36,000 crore out of the system.

“Liquidity is abundant in the system as usual and demand was not seen much today because of advance covering of reserves by banks. So, there was downward pressure on CBLO rate,” said a dealer at a state-owned bank.

Today, the central bank raised CRR by 75 bps in two stages. The first, a 50-bps hike, will come into force on February 13, and the second, a 25-bps hike, will be effective from February 27.

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According to the latest data by the reserve Bank of India (RBI), their investment in MF stood at Rs 103,087 crore at the end of January 15 from Rs 42,428 crore at the end of January 1. During the period, bank credit declined by Rs 11,898 crore.

After the central bank expressed reservations over banks’ MF exposure, it was anticipated that banks would withdraw from the segment.

During the last fortnight ended January 1, banks had withdrawn Rs 104,851 crore from MFs in order to avoid higher provisioning to meet the capital adequacy ratio, since these instruments carry a high risk weight of 125 per cent.

“Until credit demand picks up, banks will continue to invest in mutual funds. The hike in CRR may not affect banks’ investment in MF, as there will be enough liquidity even after Rs 36,000 crore will be sucked out,” said a senior executive of a public sector bank.

MF players also expect banks’ investment to continue till credit offtake picks up. “The CRR hike may not impact banks’ investment in MFs. Liquid schemes gives them better returns compared to other instruments available to them for investment,” said Ashish Kumar, fund manager at LIC Mutual Fund.

Liquid schemes are offering 4.13 per cent return, while reverse repo is giving only 3.25 per cent. Banks park surplus funds in MFs, reverse repo or call money market. Banks were parking in excess of Rs 60,000-70,000 crore in reverse repo during the last one week. Today, banks parked Rs 38,860 crore in the reverse repo window.

As the demand for funds remained low, credit grew by 13.88 on a year-on-year basis at the end of January 15. Though RBI has lowered the credit growth target to 16 per cent, but to meet even this target, banks will have to lend an additional Rs 198,000 crore by the year-end. Bankers expect MF investments to drop in early March when credit demand will pick up and the increase in CRR is implemented.

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Brian Moynihan, Oswald Gruebel and Josef Ackermann, leaders of some of the world’s biggest banks, met during the World Economic Forum in Davos, Switzerland, to plot how to reassert their influence with regulators and governments.

Chief executive officers including Bank of America Corp’s Moynihan, UBS AG’s Gruebel and Deutsche Bank AG’s Ackermann convened yesterday, a week after US President Barack Obama shocked financiers with plans that may force large banks to limit their size and curb investments in hedge funds and private equity.

The private meeting, held down a hallway near the back entrance of the Davos conference center, aimed to prepare executives for another private gathering in Davos on January 30 with top policymakers and regulators, including US House Financial Services Committee Chairman Barney Frank.

“We’re trying to figure out ways that we can be more engaged,” Moynihan said in an interview after he left the meeting with about 30 financial CEOs. “Because, honestly, we were not considered to be the right kind of people to talk to for the ideas on how to fix this thing.”

Moynihan said that much of the discussion was about tactics, such as who the executives should approach and when. He said the bankers were concerned that too much regulation could hamper economic growth and that conflicting national approaches need to be avoided.

“It was a positive meeting, we’re in consensus,” Gruebel said during a break in the three-hour session, declining to provide further details. “Global banks would like to have a level playing field, but regulators have a national view and politicians too.”

The attendees included Credit Suisse Group AG CEO Brady Dougan, Barclays Plc President Robert Diamond and HSBC Holdings Plc Chairman Stephen Green. Leaders of many industries hold private meetings at the World Economic Forum every year.

Nobel laureate Joseph Stiglitz, the Columbia University economist who was also in Davos, said bankers welcome the focus on a global accord on regulation.

“The bankers are loving this because they know we will never get an agreement and we’ll never get regulation and we’ll go back to where we were,” he said.

In a separate private gathering next door, Congressman Frank spoke to about 50 investors, including KKR & Co co-founder Henry Kravis, Carlyle Group Managing Director David M Rubenstein and Third Point LLC CEO Daniel Loeb.

“The purpose of the meeting was to have a good sense of how do you develop good regulation at a time when there’s so much friction in the market,” said Jack Ehnes, CEO of the California State Teachers’ Retirement System, the second-biggest US public pension fund, who attended the meeting.

Frank, wearing snow boots and an untucked shirt under his pinstriped suit, said after the session that he was going to “crack down” on hedge funds. He didn’t elaborate.

French Finance Minister Christine Lagarde said in Davos that there should be a “dialogue” between governments and banks on the technicalities and principals of regulation. “That’s the only way we’re going to get out of it,” she said.

Two participants at the bank CEO meeting said that Obama’s proposals didn’t dominate the discussion.

“It’s a little hard to figure out exactly what the words mean, and that will be shaped over time,” Bank of America’s Moynihan said. He said Bank of America and some other banks have a “minimum” amount of profit and revenue derived from so-called proprietary trading and investments.

Executives interviewed after the meetings said they understand that new rules are inevitable and urged national regulators to coordinate through the Group of 20 or other international bodies.

Some executives said they think the biggest challenge for the industry is overcoming public anger about bonuses and compensation.

“When you talk to politicians, the big issue is pay, pay, pay,” UBS’s Gruebel said.

Even though the industry has taken steps to reform its pay practices, the public isn’t satisfied, he said.

“You can’t say to anyone who’s lost his job that we used to pay someone 10 million and now we’re paying 1 million,” Gruebel said.

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UK Chancellor of the Exchequer Alistair Darling said bankers should stop complaining and get to work

Darling, who spoke today to reporters before meeting bankers at the World Economic Forum annual meeting in Davos, Switzerland, said, “my message would be, is rather than feel sorry for yourselves the best thing is to work with governments.”

“It’s in their interest to get off the front pages and do what they’re supposed to do — provide credit to the economy,” he said.

Leaders of some of the world’s biggest banks met in Davos to plot how to reassert their influence with regulators and governments a week after US President Barack Obama shocked them with plans that may force large banks to limit their size and curb investments in hedge funds and private equity.

In the UK, Darling imposed a 50 per cent tax on bonuses of more than £25,000 ($40,310).

“There’s a recognition among a number of bankers that can see the bigger picture that maintaining a stand-off, swapping insults, doesn’t work,” he said. “Banks have to operate in the same world as the rest of us.”

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India’s foreign exchange reserves fell $2.22 million to $282.94 billion during the week ended January 22 on account of revaluation of currencies. As a result, foreign currency assets fell $2.18 million to $258.08 billion during the week. Gold remained unchanged while special drawings right declined by $34 million. Reserve position in the International Monetary Fund dropped $10 million to $1.42 billion in the reserve.

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On the eve of the monetary policy review, the Reserve Bank of India sounded upbeat on growth but worried over inflation.

In the Macroeconomic & Monetary Developments report released this evening, the central bank drew comfort from the forecasters’ survey — which estimated that the Indian economy would grow by 6.9 per cent this year — and improved business sentiments.

At the same time, RBI said the pressure on headline inflation from high food prices entailed the risk of being transmitted to non-food items through expectations driven wage-price revision and magnifying into generalised inflation.

“The growth outlook has clear upside prospects and the inflation outlook has upside risks,” RBI said. A stronger recovery could make inflation a generalised process, it said in the 93-page document.

Anchoring inflation, which touched 7.3 per cent in December, and inflationary expectations is expected to be the main theme of Governor D Subbarao’s statement tomorrow, but the pre-policy paper did not drop any hints.

It said the upside risks to inflation came from supply constraints for food articles tapering off only over a period of time; indications of a global rise in food prices and a rebound in commodity prices; return of pricing power with stronger recover and wage price revisions linked to consumer price inflation; rebound in private demand and asset price increase with higher capital inflows.

What could provide some buffer were the possibility of arrival of post-harvest crops in the last quarter, release of additional rice and wheat stocks, no further increase in the minimum support price and higher rabi production.

The economic forecasters’ survey, however, raised the wholesale price inflation-based forecast for the current financial year from 3 per cent estimated to earlier to 4.4 per cent.

Like RBI, they were more bullish on growth and raised the forecast for the year from 6 per cent to 6.9 per cent. This was primarily due to higher growth estimates for the industry and services sectors and a lower than expected contraction by the farm sector, which has been hit by deficient rains (see table).

According to the central bank’s assessment, there are more upside risks than downside risks. Its optimism stemmed from an acceleration in GDP growth to 7.9 per cent during the second quarter, a turnaround in exports after 13 consecutive months of decline, strong industrial recovery, early signs of significant growth in corporate sales in the third quarter, improved corporate profitability, revival of private final consumption demand and improvement in fixed capital.

There were other factors too such as revival in stock market, signs of global recovery, turnaround in credit growth, higher flow of resources from non-banking finance companies and more business confidence. Plus, RBI said that there was a revival in capital inflows but also listed it as something that needed to be factored into policy-making.

The downside risks to growth listed by RBI included the global recovery turning out to be less robust than expected, possibility of an oil price shock and the impact of the deficient rains on farm output, a large part of which is yet to be reflected in the GDP data.

Further, it said there could be possible pressure on interest rates with revival in demand for credit from the private sector. And, inventory build-up could reach the cyclical peak, given the turnaround in inventory cycle since the second quarter. The external conditions could also hamper the performance of the services sectors such as tourism that were dependent on external demand, it added.

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