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SECTOR UPDATE - BFSI : Post 'Congress Rally'

SECTOR UPDATE - BFSI ( Thanks to research departments of various analytical firms)
Strong government – positive catalyst; but there is a price for everything
A couple of thoughts on BFSI sector post the “Congress rally”
Strong UPA led government can have following positive impacts for BFSI sector:
Fundamental impact – earnings upgrade, RoE expansion
􀂄 Investment and credit activities to pick up – enhanced liquidity and improved industrial
activity will bring confidence among corporates to borrow and invest; thrust on
infrastructure will continue etc
- Positive for the whole sector, as it would enforce revision of consensus credit growth
estimates
- SBI is key beneficiary as it has huge balance sheet liquidity to fund credit growth
􀂄 Recovery in economy and comfortable liquidity to further assuage concerns on asset
quality
􀂄 Capital market activities to go up further from here – brokerage volumes, investment
banking deals, inflows into mutual funds/PE funds etc
- FII/FDI inflows likely go up
- Confidence building at retail investors’ level
- Corporates would be looking to raise capital
- Preferred plays Kotak, Yes Bank etc
Possible reforms in the medium term:
􀂄 Insurance: increase in FII investment limit would pave way for value unlocking, which
would be a big fundamental boost to some companies’ profitability (capital positions) -
HDFC, ICICI Bank would be the key beneficiary of insurance reforms;
􀂄 Voting rights if brought in line with the shareholding should enhance value of private
banks;
􀂄 Relaxation on PSU banks ownership
- Increase FII ownership limits from 20% on PSU bank to say 25-30%
- Minimum government ownership of 51% can be lowered in mid-sized PSU banks (do
not expect in large PSU banks)
Fiscal deficit to remain high:
Though this government would act more responsibly (than collation/interim), combined fiscal
deficit could still be high at 12% (our Economist’s estimates)
Excess liquidity eventually to get absorbed in the system and would put pressure on bond yields and push it to 6.75-7.0% levels
Partly financed by increased system liquidity from foreign inflows and possible opening of
debt market to foreigners
Equity books of banks would have strong profits considering the market up move (of 40%)
since March-09, which would further support profits in FY10. SBI has around INR 35 bn
invested in equities.
A strong government is likely to bring in more positive for PSU banks than for
private players in form of reforms and PSU banks are better equipped (with liquid balance
sheets) to cash on the improvement in economy. Moreover, PSU bank basket has
underperformed private peers by 34% in last 3 months mainly due to concerns on asset
quality and valuation gap between PSU and private banks/companies has widened to all time
high.

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