Companies & Sectors
Asset quality pain continues in 4QFY13 for Bank of Baroda

During the quarter there was a tax write-back of Rs4.8 billion which boosted the net profit for Bank of Baroda, points out Nomura Equity Research in its Quick Note

 
Bank of Baroda’s management expects domestic loan delinquency for the next couple of quarters to be at the level seen in 4QFY13, while international loan delinquency should improve starting 1QFY14. This means that the asset quality pain will continue for the bank from recent quarters, according to Nomura Equity Research in its Quick Note. Delinquencies came in higher at Rs20.8 billion compared to Rs20 billion in 3Q. The bank restructured loans of Rs28.4 billion versus Rs15.9 billion in the previous quarter. This takes the total impairment to Rs49.6 billion compared to Rs35.9 billion in the previous quarter. The management has further guided for a restructuring pipeline of Rs53 billion for 1QFY14F. 
 
There is healthy balance sheet growth for the bank in the recent quarter, point out Nomura analysts. Loans grew 14.2% year-on-year compared to Nomura’s estimate of 13.1% year-on-year. Loan growth was supported by 30.3% year-on-year growth in SME segment and 21.8% year-on-year growth in international book. The management has guided for 1-2% higher than industry loan growth for FY14F. The bank is looking to grow the retail and SME books more aggressively than the corporate loan book. The bank is looking at adding 600 plus branches in FY14.
 
NIMs (net interest margins) declined 14bps quarter-on-quarter during the quarter to 2.51% (2.65 in 3Q) as yields on advances declined 32bps quarter-on-quarter. Yield on domestic advances declined 26bps quarter-on-quarter, whereas cost of domestic deposits increased 8bps quarter-on-quarter.
 
During the quarter there was a tax write-back of Rs4.8 billion which boosted the net profits for Bank of Baroda, points out Nomura Equity Research.
 
According to Nomura’s analysts, the key ratios of the bank are as below:
 
 
The analysts have also summarised the asset quality position as follows:
 

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GOACAN seeks extension for public consultation on draft industrial policy

Goa’s consumer rights body has asked the state government to extend the time for public consultation on its draft industrial policy by one month, to give stakeholders sufficient time to submit their opinions

 
Goa Civic and Consumer Action Network (GOACAN), a consumer rights body, has called for more time for public consultation on the state’s new draft industrial and investment policy.
 
In an advertisement published in local newspapers, the Goa government has called for views, comments and suggestions on the policy by 15th May. “GOACAN is of the firm belief that if a public consultation has to meaningful, representative and participatory then sufficient notice and time needs to be provided. In view of the above, GOACAN calls upon the Directorate and the Task Force to extend the last date for submitting views, comments and suggestions to 15th June thereby providing a clear 30 days for this participatory process,” Roland Martins, co-ordinator of the Network said in a release.
 
Goa’s Directorate of Industries, Trade & Commerce and the state government have appointed a task force for preparing the state’s industrial/ investment policy 2013 and are seeking public opinions on the same through an ad published on 8th May.
 
“The month of May is a time for holidays and many citizens may not be able to participate in this very important exercise which is meant to ‘accelerate environmentally conscious industrial development, create sustainable employment for the local youth and ensure competitiveness of existing industry’,” GOACAN said. 
 

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Interest rates continue to move lower across the yield curve, says Nomura

Nomura expects underperformance of the 9 year-15 year zone of the bond curve to reverse and swap curve flattening to persist

 
Interest rates continue to move lower across the yield curve of various rates products (from bonds to swaps), reinforcing the strategic bullish view on India rates, opines brokerage firm Nomura. In fact, it believes bond markets are facing the typical bull market questions of selection rather than participation: not whether to buy, but rather which bonds to buy. “In markets like these it is important to discuss the factors that impact the outperformance of one part of the yield curve versus another, as we believe capturing yield curve dynamics will generate the alpha for investors,” said Nomura. 
 
The brokerage takes a look at the factors that it believe will lead to a reversal of the underperformance of the 9 year-15 year part of the bond yield curve in the next month or two. Assuming repetitive assertion is an important part of a strategists’ job, it notes that on the swap curve, flatteners continue to make sense and remain our preferred trade to express the nature of the current economic cycle.
 
Fly depicting 9yr-15-yr underperformance
Nomura, swap curve, bond curve, interest rates, bonds, swaps, bull market, yield curve dynamics, spread
9 year-15 year underperformance on the bond curve to reverse over the next two months
 
The current price action in rates markets continues to reinforce the strategic bullish view on India rates. However, simply being bullish is too simplistic, says Nomura, while discussing which part of the yield curve will outperform, following the recent theme of yield curve dynamics generating alpha for investors. 
Over the last few months, Nomura has argued that the outperformance of the 3year-5year sector of the India bond yield curve. In line with its expectations, this part of the yield curve has outperformed, with the 5s10s spread moving from -2bp to 20bp by the end of last week. 5s30s also moved from 15bp in mid-January to 30bp, with some flattening last week. This outperformance in the 5year sector is primarily due to technical reasons such as supply differential, liquidity dynamics and positioning dynamics. April saw supply with no Reserve Bank of India (RBI) open market operations (OMOs), as liquidity conditions were reasonably comfortable due to government spending. The RBI has also carried out three consecutive rate cuts since January, which impacted the front end of the curve more than the backend. 
 
5s10s Spread
Nomura, swap curve, bond curve, interest rates, bonds, swaps, bull market, yield curve dynamics, spread
However, according to Nomura, the impact of these technical reasons is already priced into the market and some of these reasons should reverse from here on. The brokerage believes the announcement on the amount and timing of OMOs will be an important driver of bond markets. Also, Nomura does not expect the RBI to cut rates in June, hence front-end outperformance should take a pause for the next month or two. It believes that the new 10 year benchmark, which will be issued this week, will only have a marginally positive impact on surrounding bonds. The new 10 year benchmark will likely come at around a 12-15bp premium to the current benchmark. However, once issued, one can expect spread compression between the older benchmark and the newer benchmark, as the older benchmark remains the candidate for OMOs with no further supply, stated Nomura. 
 
As far as secondary-market liquidity is concerned, the current benchmark should remain more liquid than the newer benchmark, at least until July—it will take a couple of months before the newer benchmark reaches a reasonable outstanding amount of Rs250 billion. All in all, there are strong reasons for 9 year-15 year benchmark underperformance to reverse over the next month or two, according to Nomura. However, on a three to six–month horizon, it believes the 3 year-5 year part of yield curve will remain a sweet spot, and therefore remain very comfortable with its current long 5 year bond recommendation. Nomura continues to target 7.17% (India government bond 8.07 2017; Initial Entry 8.17%; Last Entry 7.82%; Current 7.42%; Target 7.17%).
 
Current liquidity conditions and OMO expectations
According to Nomura’s estimates, the total system liquidity deficit (banking system liquidity deficit + government cash surplus) is approximately Rs650 billion, with an estimate of the government cash surplus at approximately Rs300 billion as of 3 May. The brokerage believes the RBI will conduct another Rs400 billion-Rs500 billion of OMOs to keep banking system liquidity conditions relatively comfortable. Overall, it expects Rs1.2-1.4 trillion of OMOs this fiscal year.
 
Liquidity
Nomura, swap curve, bond curve, interest rates, bonds, swaps, bull market, yield curve dynamics, spread,
In swaps, flatteners remain our high conviction trade
In swaps, flatteners remain a favourite high conviction trade for Nomura. Its view of swap flatteners is primarily dependent on the assumptions that: 1) the RBI will continue to be reluctant in its approach toward monetary easing, which is evident from its cautious guidance despite delivering a 25bp repo rate cut at its May policy meeting; 2) liquidity will remain in deficit; and 3) the low-growth environment means receive pressure in the belly of the swap curve should be maintained. 
 
On liquidity, Nomura’s models suggest that banking system liquidity will continue to remain in deficit, at least over the next two to three months. Liquidity deficit conditions should also keep MIBOR fixings elevated, averaging 5-10bp over the repo rate. OMOs are another reason encouraging a receive bias in the belly (3 year-5 year) of the swap curve. Overall, it remains reasonably comfortable with its swap flattener view and continues to see value in recommending 1s3s swap flatteners (Last Entry in Feb -31bp, Current levels including carry-roll: -58 bp, Target -60bp). “Even as we are fast approaching our target of -60bp, we see value in holding to our flattener view and do not see a compelling need to take profit even after hitting our target,” says Nomura.
 
Swap curve flatteners (spot and forward space)
 

Nomura, swap curve, bond curve, interest rates, bonds, swaps, bull market, yield curve dynamics, spread,

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