Interest income grows by 14% YoY in 9mFY10, 4% YoY in 3QFY10.
Provisions triple for the third quarter as the bank provides for incremental slippage and complies with RBI’s provisioning mandate.
Cost to income ratio increases from 47% in 9mFY09 to 52% in 9mFY10 on the back of additional hiring.
Gross and net NPAs rise to 3.1% and 1.9% from 2.5% and 1.4% of advances respectively in 9mFY09.
Capital adequacy ratio at 13.8% (as per Basel II) at the end of 9mFY10.
Board declares an interim dividend of Rs 10 per share.
Having leveraged on its strength in low cost deposits (CASA) at a time when most banks are grappling with higher interest rates, the excess liquidity seems to have been a bane of contention for India’s largest bank this quarter. SBI made an appreciable effort to increase its market share in both deposits (16.1% in 9mFY10) and advances (16.9% in 9mFY10). The bank tapped its relationships with large corporates as well as retail customers, to grow its deposit base. However, not all of it could be deployed profitably. As a result, the bank witnessed nearly 60 basis points (0.6%) drop in net interest margins. In the retail segment, home loans (comprising over 29% of the bank’s retail advance book) grew by 30% YoY, auto loans by 32% and personal loans by 31% YoY in the last 9 months. In home loans, the bank has an average ticket size of Rs 1.0 m, making the most of its priority sector lending. Also, 98% of the home loan borrowers were first time buyers.
While the bank’s advance growth has been higher than our estimates, its net interest margins are well in line with our estimates for full year FY10.
The bank’s fee income showed a healthy growth of 46% YoY, bringing the fee to total income ratio to 22.5% in 9mFY10 from 17.6% in 9mFY09.
The natural attrition has led to a sharp decline in the cost to income ratio of the bank from 55% in 1HFY08 to 46% in 1HFY09. However, as the bank will be recruiting 25,000 new employees in 2HFY09, we see this ratio going up marginally in the near future.
SBI did feel the heat on its NPAs in the past 12 months with net NPAs rising to 1.9% of advances from 1.4% in 9mFY09. Also, the bank does foresee some delinquency risks in its SME and retail loan books going forward. The provision coverage ratio stood at around 50% in 9mFY09 and the bank needs to bring it up to 70% by 1HFY11. SBI also revealed that of its Rs 168 bn of restructured assets about 6% have turned into NPAs so far and it expects about 10% of the restructured assets to become incremental NPAs.
While the bank’s advance growth has been higher than our estimates, its net interest margins are well in line with our estimates for full year FY10.
Being the bank with the largest franchise, SBI has been receiving Rs 50 bn of low-cost savings deposits per month in FY10. The increase in low-cost savings deposits brought excess liquidity to the bank’s books and this cost it as much. The carrying cost for this was about Rs 2 bn while the opportunity cost was about Rs 6 bn. SBI believes that even if RBI increases CRR (cash reserve ratio) by 0.5% in its monetary policy review, its liquidity will reduce by Rs 60 bn, hardly impacting its average liquidity of Rs 750 bn. In this situation, the bank does not see its lending rates increasing in the next six months.
At the current price of Rs 2,093, the stock is trading at 1.5 times our estimated FY12 standalone adjusted book value. SBI’s balance sheet growth continues to remain ahead of the industry due to its widespread rural and semi-urban presence. Although we anticipate lower growth and muted margins in the near term, the bank, given its balance sheet size, penetration and the possibility of merger with associates remains a preferred play for the long term.
Thursday, January 28, 2010
Lakshmi Energy:Q3FY10 Result Update
Consolidated top-line increased by 15% YoY during 1QFY10.
Consolidated operating (EBITDA) margins contract by 1.5% due to faster decline in expenses as compared to sales.
Consolidated net profit margins increased by 36% YoY on the back of higher sales and lower tax expense.
Consolidated operating (EBITDA) margins contract by 1.5% due to faster decline in expenses as compared to sales.
Consolidated net profit margins increased by 36% YoY on the back of higher sales and lower tax expense.
Saturday, January 23, 2010
ITC Q3FY10: Cigarette business boosts growth
Top line grows by 19% YoY in 3QFY10 bolstered by a strong growth in cigarettes business.
Operating profits grow at a higher rate of 24% YoY as the company achieves scale in its FMCG business.
Net profit margins come in higher at 25%, an increase of 1.6% over 3QFY09. This growth was aided by higher operating income as well as other income.
Bottomline 24% YoY during 9mFY10 on the back of higher profitability in the FMCG and agri businesses.
At the current price of Rs 251, the stock trades at a P/E multiple of 22.6x our estimated FY12 earnings per share. The company has done well this quarter across segments, the hotel business continues to disappoint. However, the profitability of the hotel business has improved during the year.
Operating profits grow at a higher rate of 24% YoY as the company achieves scale in its FMCG business.
Net profit margins come in higher at 25%, an increase of 1.6% over 3QFY09. This growth was aided by higher operating income as well as other income.
Bottomline 24% YoY during 9mFY10 on the back of higher profitability in the FMCG and agri businesses.
At the current price of Rs 251, the stock trades at a P/E multiple of 22.6x our estimated FY12 earnings per share. The company has done well this quarter across segments, the hotel business continues to disappoint. However, the profitability of the hotel business has improved during the year.
Reliance Q3FY10 Result
Net sales increase by 92% YoY during 3QFY10, led by a 143% growth in the company's refining business. Revenues from the petrochemical business grow by 17% YoY.
In the oil & gas (exploration & production) business, the company achieved higher earnings before interest and taxes (EBIT) on account of the production from KG D6 fields. However, margins declined due to the higher depletion rate as compared to the production from Panna Mukta Tapti (PMT) fields.
The company's refineries achieved an utilisation rate of 115% and 100% during the quarter. Gross refining margins stood at US$ 5.9 per barrel during the quarter, as compared to US$ 10 per barrel in 3QFY09. During the period, light-heavy crude differential were at their lowest in last few years. The middle distillate cracks were under pressure due to low industrial activity, low demand from transport sector and high inventory.
The petrochemical segment of Reliance Industries posted a strong performance during the quarter. Domestic demand for most of the petrochemical products remained strong. There was a substantial improvement in as the industry was operating on low level of inventory leading to higher domestic realisations.
Reliance Industries recorded a 4.4% YoY decline in operating margins (to 13.8%).This is largely on account of higher raw material costs, i.e. crude oil and naptha (as a percentage of sales).
During 9mFY10, the Petroleum Trust sold 15 m equity shares of Reliance Industries. The Trust realised about Rs 32 bn, at an average price of about Rs 2,125 per share. After 31st December 2009, the Petroleum Trust further sold 59 m equity shares and realized about Rs 62 bn at an average price of about Rs 1,044 per share. Reliance Industrial Investments and Holdings, a wholly owned subsidiary of RIL, is a beneficiary of the Trust.
The company had an outstanding debt of Rs 700 bn as on 31st December 2009. It had cash and cash equivalent of Rs 160 bn.
While RIL's refining segment is currently witnessing margins pressure, it has a structural advantage vis-a-vis other refiners on the back of superior product mix and complex refinery configuration. Hence, its GRMs will rebound faster compared to its peers going forward. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region.
RIL's investments in exploration and production (E&P), organised retail and development of special economic zones (SEZs) will all be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint significantly to 14 blocks. There exists immense potential regarding further upside to the company's current reserves.
At the current price of Rs 1,051 the stock is trading at a multiple of 22 times its standalone trailing twelve months earnings. While the stock is still off its all time highs, issues like complex group structure and inadequate disclosure in areas like segment wise sales and cost break up make assessment of its intrinsic value a difficult task.
In the oil & gas (exploration & production) business, the company achieved higher earnings before interest and taxes (EBIT) on account of the production from KG D6 fields. However, margins declined due to the higher depletion rate as compared to the production from Panna Mukta Tapti (PMT) fields.
The company's refineries achieved an utilisation rate of 115% and 100% during the quarter. Gross refining margins stood at US$ 5.9 per barrel during the quarter, as compared to US$ 10 per barrel in 3QFY09. During the period, light-heavy crude differential were at their lowest in last few years. The middle distillate cracks were under pressure due to low industrial activity, low demand from transport sector and high inventory.
The petrochemical segment of Reliance Industries posted a strong performance during the quarter. Domestic demand for most of the petrochemical products remained strong. There was a substantial improvement in as the industry was operating on low level of inventory leading to higher domestic realisations.
Reliance Industries recorded a 4.4% YoY decline in operating margins (to 13.8%).This is largely on account of higher raw material costs, i.e. crude oil and naptha (as a percentage of sales).
During 9mFY10, the Petroleum Trust sold 15 m equity shares of Reliance Industries. The Trust realised about Rs 32 bn, at an average price of about Rs 2,125 per share. After 31st December 2009, the Petroleum Trust further sold 59 m equity shares and realized about Rs 62 bn at an average price of about Rs 1,044 per share. Reliance Industrial Investments and Holdings, a wholly owned subsidiary of RIL, is a beneficiary of the Trust.
The company had an outstanding debt of Rs 700 bn as on 31st December 2009. It had cash and cash equivalent of Rs 160 bn.
While RIL's refining segment is currently witnessing margins pressure, it has a structural advantage vis-a-vis other refiners on the back of superior product mix and complex refinery configuration. Hence, its GRMs will rebound faster compared to its peers going forward. On the petrochemical front, margins are going to reduce gradually with incremental capacities coming on stream in the Middle East region.
RIL's investments in exploration and production (E&P), organised retail and development of special economic zones (SEZs) will all be the cornerstones for future growth. In the E&P segment, it has expanded its international E&P footprint significantly to 14 blocks. There exists immense potential regarding further upside to the company's current reserves.
At the current price of Rs 1,051 the stock is trading at a multiple of 22 times its standalone trailing twelve months earnings. While the stock is still off its all time highs, issues like complex group structure and inadequate disclosure in areas like segment wise sales and cost break up make assessment of its intrinsic value a difficult task.
Thursday, January 21, 2010
WIPRO Q3FY10 Result Update
Sales remain flat sequentially during 3QFY10, primarily on account of muted performance from its IT services and IT product segments.
Operating margins expand by 0.6% QoQ. This is on the back of cost containment measures and improved volumes.
Net profits grow by 5% QoQ during the quarter on the back of lower interest and depreciation charges, coupled with higher share of gains from associates.
Employee strength of the IT services business stood at 102,746 at the end of December 2009. IT services added 4,855 (net) employees during 3QFY10.
Wipro’s topline grew marginally by 0.3% QoQ during 3QFY10. This was primarily on account of muted performance in the IT services and products businesses. The IT services business, which contributed 74% to the company’s total sales, grew by 3.4% QoQ. The IT products business (14% of sales) could not match up the robust growth witnessed in the last quarter and saw a sequential decline of 15% QoQ.
Further, Wipro’s consumer care and lighting business (9% of sales) grew by around 3% QoQ during 3QFY10. In terms of industry verticals, the company registered robust business in the healthcare services and energy and utilities verticals, which contributed nearly 9% and 10% respectively to the consolidated IT services revenue during 3QFY10. The company also witnessed an uptick in demand in the financial services and media and telecom segments. The company witnessed a decent performance for its application development and infrastructure services. However, the performance remained muted for package implementation and testing services.
IT services adds 31 new clients during the quarter.
In terms of geographies, revenues from Wipro’s major market for IT services i.e., the US (43% of the topline) saw a decline of 2% QoQ. India (22%) also declined 12% QoQ during the quarter. However, sales from the European markets (21%) grew by 5.4% QoQ. Sales from rest of the world (14%) surged by 27% QoQ.
Wipro’s operating margins expanded by 0.6% QoQ during 3QFY10. This can be credited to better utilisation levels, cost containment, aided by a push towards offshoring. However, currency fluctuation impacted the margins negatively.
Wipro reported a decent 5% QoQ growth in net profits during 3QFY10. This was mainly aided by better operating margins and increased share of profits from associates.
Operating margins expand by 0.6% QoQ. This is on the back of cost containment measures and improved volumes.
Net profits grow by 5% QoQ during the quarter on the back of lower interest and depreciation charges, coupled with higher share of gains from associates.
Employee strength of the IT services business stood at 102,746 at the end of December 2009. IT services added 4,855 (net) employees during 3QFY10.
Wipro’s topline grew marginally by 0.3% QoQ during 3QFY10. This was primarily on account of muted performance in the IT services and products businesses. The IT services business, which contributed 74% to the company’s total sales, grew by 3.4% QoQ. The IT products business (14% of sales) could not match up the robust growth witnessed in the last quarter and saw a sequential decline of 15% QoQ.
Further, Wipro’s consumer care and lighting business (9% of sales) grew by around 3% QoQ during 3QFY10. In terms of industry verticals, the company registered robust business in the healthcare services and energy and utilities verticals, which contributed nearly 9% and 10% respectively to the consolidated IT services revenue during 3QFY10. The company also witnessed an uptick in demand in the financial services and media and telecom segments. The company witnessed a decent performance for its application development and infrastructure services. However, the performance remained muted for package implementation and testing services.
IT services adds 31 new clients during the quarter.
In terms of geographies, revenues from Wipro’s major market for IT services i.e., the US (43% of the topline) saw a decline of 2% QoQ. India (22%) also declined 12% QoQ during the quarter. However, sales from the European markets (21%) grew by 5.4% QoQ. Sales from rest of the world (14%) surged by 27% QoQ.
Wipro’s operating margins expanded by 0.6% QoQ during 3QFY10. This can be credited to better utilisation levels, cost containment, aided by a push towards offshoring. However, currency fluctuation impacted the margins negatively.
Wipro reported a decent 5% QoQ growth in net profits during 3QFY10. This was mainly aided by better operating margins and increased share of profits from associates.
Yes Bank Q3FY10 Result Update
Interest income grows 18% YoY in 9mFY10 on the back of 71% YoY growth in advances.
Other income grows by 22% YoY in 9mFY10 backed by traction in financial advisory business.
Net interest margin improves from 2.8% in 9mFY09 to 3.1% at the end of 9mFY10.
Bottomline grows 51% YoY in 9mFY10 due to better management of operating costs.
Capital adequacy ratio (CAR) comfortable at 16.2%, gross NPA at 0.3%.
Other income grows by 22% YoY in 9mFY10 backed by traction in financial advisory business.
Net interest margin improves from 2.8% in 9mFY09 to 3.1% at the end of 9mFY10.
Bottomline grows 51% YoY in 9mFY10 due to better management of operating costs.
Capital adequacy ratio (CAR) comfortable at 16.2%, gross NPA at 0.3%.
Tuesday, January 19, 2010
JAL Bankruptcy
It is a known thing as to how the global airline industry is reeling under heavy losses. Worldwide international air travel fell by more than 4% last year causing losses of more than 11 billion USD to the industry.
Our Home grown airlines are no exceptions and we have been witnessing the various dramas that are being narrated in the Indian skies. We have been seeing how the state run and the private airlines out here are struggling to stay afloat. There have been only calls for restructuring, management changes, improved operational efficiency and bailout packages. However, as of now nothing concrete has happened.
I have always had this doubt as to how come some private airlines like Jet Air is still afloat in spite of the business making no money, no sight of turnaround anywhere nearby, no infrastructure improvement, over capacity and piling up of debts. I find it really tough to understand a 4000 crore company like Jet paying around probably 900 crore or even 1000 crore in interest expense this financial year to service around 16,000 crore of debt. It is to be seen if any our airline would follow the Japanese Airlines.
Japanese Airlines, Asia's largest by revenues filed for bankruptcy under a 10 billion USD turnaround plan after four government bailouts failed to revive Asia's most indebted carrier. The company applied for protection from creditors at Tokyo District Court today with more than 2.3 trillion yen in liabilities. The airline flew more than 45 million passengers last year.
The company plans to shed staff, cut routes and retire older planes as it is trying to restructure following a 131 billion yen first half loss. The airline which is worth more than 6 billion USD last year will be delisted and this wiping out the wealth of shareholders. The company's shares fell recently from above 1 USD to just 8 cents.
JAL will likely get 730 billion yen in debt forgiveness, including 350 billion yen from financial institutions, Enterprise Turnaround Initiative Corp. of Japan, the state- affiliated fund leading JAL’s restructuring, said without elaboration. Unsecured creditors will be asked to waive about 83 percent of claims, based on figures in the plan. JAL will cut its workforce to 36,201 from 51,862, retire its 37 Boeing Co. 747-400s and cut international and domestic routes.
The yield on JAL’s 10 billion yen in 2.94 percent notes due in 2013 jumped to 77 percent yesterday from 15.6 percent on Dec. 30. The notes yielded about 9.5 percent a year ago. The airline’s shares closed unchanged at 5 yen in Tokyo trading today, having slumped 93 percent this month.
Our Home grown airlines are no exceptions and we have been witnessing the various dramas that are being narrated in the Indian skies. We have been seeing how the state run and the private airlines out here are struggling to stay afloat. There have been only calls for restructuring, management changes, improved operational efficiency and bailout packages. However, as of now nothing concrete has happened.
I have always had this doubt as to how come some private airlines like Jet Air is still afloat in spite of the business making no money, no sight of turnaround anywhere nearby, no infrastructure improvement, over capacity and piling up of debts. I find it really tough to understand a 4000 crore company like Jet paying around probably 900 crore or even 1000 crore in interest expense this financial year to service around 16,000 crore of debt. It is to be seen if any our airline would follow the Japanese Airlines.
Japanese Airlines, Asia's largest by revenues filed for bankruptcy under a 10 billion USD turnaround plan after four government bailouts failed to revive Asia's most indebted carrier. The company applied for protection from creditors at Tokyo District Court today with more than 2.3 trillion yen in liabilities. The airline flew more than 45 million passengers last year.
The company plans to shed staff, cut routes and retire older planes as it is trying to restructure following a 131 billion yen first half loss. The airline which is worth more than 6 billion USD last year will be delisted and this wiping out the wealth of shareholders. The company's shares fell recently from above 1 USD to just 8 cents.
JAL will likely get 730 billion yen in debt forgiveness, including 350 billion yen from financial institutions, Enterprise Turnaround Initiative Corp. of Japan, the state- affiliated fund leading JAL’s restructuring, said without elaboration. Unsecured creditors will be asked to waive about 83 percent of claims, based on figures in the plan. JAL will cut its workforce to 36,201 from 51,862, retire its 37 Boeing Co. 747-400s and cut international and domestic routes.
The yield on JAL’s 10 billion yen in 2.94 percent notes due in 2013 jumped to 77 percent yesterday from 15.6 percent on Dec. 30. The notes yielded about 9.5 percent a year ago. The airline’s shares closed unchanged at 5 yen in Tokyo trading today, having slumped 93 percent this month.
TATA Power Q3FY10 Performance Summary
Standalone sales fall by 12% YoY during 3QFY10. This is despite a marginal rise in electricity generation and volume sales. Change in fuel mix and reduction in power tariffs in Mumbai lead the decline in sales.
Operating margins rise to 21.3% during the quarter from just 12.7% in 3QFY09 – improvement aided by lower fuel costs (as percentage of sales).
Despite a 48% YoY rise in operating profits, net profits grow by just around 29% YoY. Higher depreciation and taxes eat into the bottomline.
During 9mFY10, while sales decline by 9% YoY, net profits grow by 25% YoY.
At the current price of Rs 1,420, the stock is trading at a multiple of around 31 times its trailing 12 months earnings.
Operating margins rise to 21.3% during the quarter from just 12.7% in 3QFY09 – improvement aided by lower fuel costs (as percentage of sales).
Despite a 48% YoY rise in operating profits, net profits grow by just around 29% YoY. Higher depreciation and taxes eat into the bottomline.
During 9mFY10, while sales decline by 9% YoY, net profits grow by 25% YoY.
At the current price of Rs 1,420, the stock is trading at a multiple of around 31 times its trailing 12 months earnings.
Friday, January 15, 2010
Rallis India Q3FY10 Result
Topline suffers a small decline of 4% during the quarter on a YoY basis.
A strong 6.7% jump in operating margins boosts operating profits by 43% YoY
Buoyant other income and lower taxes combine with strong operating performance to lead to a strong bottomline growth of 55% YoY during the quarter
Bottomline for the nine month period grows 29% YoY on the back of a 3% growth in topline
The company caters to both the domestic as well as the export markets. During the quarter, the domestic business recorded handsome gains in the marketplace with farmers showing emphatic preference to some of the latest product offerings from the company. The exports business however was rather sluggish and this led to the company’s topline suffering a marginal fall during the quarter. Outlook on the domestic side appears positive as planting so far for the Rabi season has shown improvement over last year in most crops as per the company. The new project at Dahej has gained momentum during the quarter and is on track to commence production by July 2010 as per the schedule.
Some significant improvements in operating efficiencies and a benign raw material price environment has helped the company put up a strong operating performance. Raw material costs as a percentage of sales have come down by nearly 7% and this has been the sole reason behind the company’s strong operational performance. Going forward though, we expect margins to come down a bit on account of raw material price inflation and the company’s limited ability to pass on the same to its customers.
Improving upon the 43% growth in operating profits, the company’s bottomline has registered an even stronger growth of 55% YoY. This has been made possible on account of growth in other income as well as lower depreciation and tax rates. Company’s asset light model makes it strong geared towards its operating performance and hence, any significant jump in its operating performance directly filters down to its bottomline.
At the current price of Rs 1,061, the stock trades a multiple of 12x its expected FY12 earnings per share. The company seems to have done little wrong in the current quarter to erode our faith in its abilities. On the contrary, it has only managed to exceed our expectations on the bottomline front.
A strong 6.7% jump in operating margins boosts operating profits by 43% YoY
Buoyant other income and lower taxes combine with strong operating performance to lead to a strong bottomline growth of 55% YoY during the quarter
Bottomline for the nine month period grows 29% YoY on the back of a 3% growth in topline
The company caters to both the domestic as well as the export markets. During the quarter, the domestic business recorded handsome gains in the marketplace with farmers showing emphatic preference to some of the latest product offerings from the company. The exports business however was rather sluggish and this led to the company’s topline suffering a marginal fall during the quarter. Outlook on the domestic side appears positive as planting so far for the Rabi season has shown improvement over last year in most crops as per the company. The new project at Dahej has gained momentum during the quarter and is on track to commence production by July 2010 as per the schedule.
Some significant improvements in operating efficiencies and a benign raw material price environment has helped the company put up a strong operating performance. Raw material costs as a percentage of sales have come down by nearly 7% and this has been the sole reason behind the company’s strong operational performance. Going forward though, we expect margins to come down a bit on account of raw material price inflation and the company’s limited ability to pass on the same to its customers.
Improving upon the 43% growth in operating profits, the company’s bottomline has registered an even stronger growth of 55% YoY. This has been made possible on account of growth in other income as well as lower depreciation and tax rates. Company’s asset light model makes it strong geared towards its operating performance and hence, any significant jump in its operating performance directly filters down to its bottomline.
At the current price of Rs 1,061, the stock trades a multiple of 12x its expected FY12 earnings per share. The company seems to have done little wrong in the current quarter to erode our faith in its abilities. On the contrary, it has only managed to exceed our expectations on the bottomline front.
HDFC Q3FY10 Performance
Interest income remains flat in 9mFY10 on YoY basis despite 21% YoY growth in advances. Stagnancy in income stems from downward re-pricing of assets. NIMs improve marginally due to maturity of high cost term deposits; CASA level higher at 49% in 9mFY10. Operating expenses lowered in 3QFY10, cost to income ratio at 47% as against 53% in 9mFY09. Net NPA to advances come down from 0.6% in FY09 to 0.5% in 9mFY10. Provision coverage ratio at 72% in 3QFY10. Capital adequacy ratio (CAR) comfortable at 18.3%, Tier I CAR at 13.8% in 9mFY10.
Notwithstanding the slower growth in the erstwhile CBoP assets, which was well anticipated, HDFC Bank managed to marginally outperform the banking sector in the first nine months of this fiscal. The growth of 21% YoY in advances during the April 2009 to December 2009 period was way ahead of the sector growth of 12% YoY. It may also be noted that the bank had 1,725 branches at the end of 9mFY10 as against 1,412 branches in 9mFY09. Clearly focusing on garnering low cost deposits (current and savings accounts) through its own as well as the branches of the erstwhile Centurion Bank of Punjab (CBoP), helped HDFC Bank post a decent growth in profitability during the period under consideration. The stagnancy in interest income, however, stems from downward re-pricing of the bank’s assets, despite higher asset growth.
The proportion of low cost deposits (CASA) in HDFC Bank’s books improved to 49% in 9mFY10 after having fallen to a 6-year low in FY09. The NIMs which improved by 0.1% to 4.3% are within our estimates for FY10. The bank has been under pressure for sometime to improve the CASA ratio in order to maintain its edge over other private sector and PSU banks. However, we believe that the NIMs may not be sustainable at the current levels once the cost of deposits starts rising.
HDFC Bank has been able to grow its fee income base by 12% YoY in 3QFY10. As a result, the proportion of fee to total income improved to 23% as against 21% in 3QFY10. However, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments, the absence of which would have otherwise aided the bank’s other income.
Due to the merger with CBoP, the quality of HDFC Bank’s asset book was impacted in FY09. The bank has, however, managed to contain the slippages over the past three quarters. HDFC Bank’s gross NPAs dropped from 1.9% of advances in 9mFY09 to 1.6% in 9mFY10. As per the bank, the erstwhile CBoP portfolio accounted for approximately 42% of the bank’s gross NPAs at the end of March 2009. Net NPAs were 0.5% of advances while the NPA coverage ratio was 72% in 9mFY10.
At the end of 9mFY10, the total restructured assets in HDFC Bank’s books were 0.4% of the bank’s gross advances and are therefore not really a concern.
At the current price of Rs 1,690, the stock is valued at 2.9 times our estimated FY12 adjusted book value. The bank’s overall performance continues to remain largely in line with our estimates. While a higher CAR (capital adequacy) is a matter of comfort, we do envisage lower asset growth and pressure on margins in the medium term.
Notwithstanding the slower growth in the erstwhile CBoP assets, which was well anticipated, HDFC Bank managed to marginally outperform the banking sector in the first nine months of this fiscal. The growth of 21% YoY in advances during the April 2009 to December 2009 period was way ahead of the sector growth of 12% YoY. It may also be noted that the bank had 1,725 branches at the end of 9mFY10 as against 1,412 branches in 9mFY09. Clearly focusing on garnering low cost deposits (current and savings accounts) through its own as well as the branches of the erstwhile Centurion Bank of Punjab (CBoP), helped HDFC Bank post a decent growth in profitability during the period under consideration. The stagnancy in interest income, however, stems from downward re-pricing of the bank’s assets, despite higher asset growth.
The proportion of low cost deposits (CASA) in HDFC Bank’s books improved to 49% in 9mFY10 after having fallen to a 6-year low in FY09. The NIMs which improved by 0.1% to 4.3% are within our estimates for FY10. The bank has been under pressure for sometime to improve the CASA ratio in order to maintain its edge over other private sector and PSU banks. However, we believe that the NIMs may not be sustainable at the current levels once the cost of deposits starts rising.
HDFC Bank has been able to grow its fee income base by 12% YoY in 3QFY10. As a result, the proportion of fee to total income improved to 23% as against 21% in 3QFY10. However, the gain on the fee income side has been eroded by the losses on revaluation and sale of investments, the absence of which would have otherwise aided the bank’s other income.
Due to the merger with CBoP, the quality of HDFC Bank’s asset book was impacted in FY09. The bank has, however, managed to contain the slippages over the past three quarters. HDFC Bank’s gross NPAs dropped from 1.9% of advances in 9mFY09 to 1.6% in 9mFY10. As per the bank, the erstwhile CBoP portfolio accounted for approximately 42% of the bank’s gross NPAs at the end of March 2009. Net NPAs were 0.5% of advances while the NPA coverage ratio was 72% in 9mFY10.
At the end of 9mFY10, the total restructured assets in HDFC Bank’s books were 0.4% of the bank’s gross advances and are therefore not really a concern.
At the current price of Rs 1,690, the stock is valued at 2.9 times our estimated FY12 adjusted book value. The bank’s overall performance continues to remain largely in line with our estimates. While a higher CAR (capital adequacy) is a matter of comfort, we do envisage lower asset growth and pressure on margins in the medium term.
Wednesday, January 13, 2010
Sintex Industries Q3FY10 Result
Performance summary
Consolidated sales grow by 3% YoY during 3QFY10. Growth led by the plastics division where sales grew 5% YoY during the quarter. Sales for the textile division fell by 6% YoY. Overall sales decline by nearly 3% YoY during the nine-month period ended December 2009.
Operating margins expand to 18.1% during 3QFY10, from 16% in 3QFY09. Expansion led by lower other expenditure. Otherwise, raw material costs rise on the back of higher commodity prices.
A good operating performance fails to lead to a good bottomline picture. Higher depreciation impacts net profits, which rise by just around 2% YoY during 3QFY10, as compared to the 17% YoY growth in operating profits. 9mFY10 profits decline by around 10% YoY.
What to expect?
At the current price of Rs 270, the stock is trading at a multiple of 10.1 times our estimated FY12 consolidated earnings for the company. Sintex’s nine-month performance is as anticipated. The management believes that it is seeing some strong signs of a pickup in economic activity that is leading to higher capacity utilization for the company. Overall, we maintain our positive view on the stock at the current juncture. One can keep HOLDing this stock.
Consolidated sales grow by 3% YoY during 3QFY10. Growth led by the plastics division where sales grew 5% YoY during the quarter. Sales for the textile division fell by 6% YoY. Overall sales decline by nearly 3% YoY during the nine-month period ended December 2009.
Operating margins expand to 18.1% during 3QFY10, from 16% in 3QFY09. Expansion led by lower other expenditure. Otherwise, raw material costs rise on the back of higher commodity prices.
A good operating performance fails to lead to a good bottomline picture. Higher depreciation impacts net profits, which rise by just around 2% YoY during 3QFY10, as compared to the 17% YoY growth in operating profits. 9mFY10 profits decline by around 10% YoY.
What to expect?
At the current price of Rs 270, the stock is trading at a multiple of 10.1 times our estimated FY12 consolidated earnings for the company. Sintex’s nine-month performance is as anticipated. The management believes that it is seeing some strong signs of a pickup in economic activity that is leading to higher capacity utilization for the company. Overall, we maintain our positive view on the stock at the current juncture. One can keep HOLDing this stock.
Infosys Q3FY10: Beats the street
Q3FY10 Performance summary
Infosys added a net of 4,429 employees during 3QFY10. Its total headcount stood at 109,882 at the end of December 2009. The utilisation (excluding trainees) improved from 73.2% in 2QFY10 to 76.2% in 3QFY10. Attrition levels increased to 11.6 % during 3QFY10 as compared to 10.9% during the previous quarter.
Despite a 3.7% appreciation in the rupee against US dollar and increase in sales and marketing expense, Infosys' operating margins expanded by almost 1% QoQ during 3QFY10. This was largely aided higher utilisation levels and containment of general and administrative cost.
Infosys reported a 3% QoQ growth in its net profits during 3QFY10. This was a result of increased volumes and improved billing rates and operating margins.
What to expect?
At the current price of Rs 2,570, the stock is trading at a multiple of 16.5 times our estimated FY12 earnings. The company appears to be inching towards recovery as evident from its 3QFY10 performance and improved business activity in terms of deals and faster decision making. On its just concluded conference call, the management appeared particularly upbeat about exceeding the guidance for the current year. The company plans to hire around 6,000 people in 4QFY10 which might result in pushing the employee cost up. Further the company expects the overall tax rates to go higher in the coming quarters as profits increase at its non-STPI business units. The management expects IT budgets of clients to remain flat for 2010, which is perhaps good news as the downfall is contained. It expects an overall growth of 3.8% and 2.4% in revenues and EPS during FY10. However, fluctuating rupee remains a concern for the company.
The company believes that its strategy to invest in advance training, newer business models and newer markets during the downturn is enabling it to grow rapidly as the recovery has started to take shape. The company's focus on intellectual property, new business models of flexible pricing and operational control are helping it win more repeat business as well as new clients. It applied for 18 process patents in India and the US during 3QFY10, taking its total pending patent applications to 219. The company's performance was bolstered by improved performance from the its subsidiaries like Infosys BPO and Infosys Tech in China, Australia and Mexico.
- Net sales grow by 3% QoQ in 3QFY10 on the back of strong deal flow particularly in the banking and financial services vertical.
- Operating margins expand by 0.9% QoQ to 35.5% during the quarter. These could have been even higher but for the impact of an appreciating rupee.
- Net profits grow by 2.7% QoQ during 3QFY10. Growth slightly slower than that in sales owing to decline in other income and higher tax outgo.
- Adds 4,429 employees (net) and 32 new clients during the quarter.
- FY10 EPS guidance stands at around Rs 107 per share, an expected growth of 2.4% YoY.
What has driven performance in 3QFY10?
Infosys recorded a topline growth of 3% QoQ during 3QFY10. This was mainly aided by higher volumes (up 5% QoQ) coupled with an increase in billing rates. As regards volumes, while offshore volumes grew by 6.5% QoQ, onsite volumes grew 5% QoQ. Billing rates (in dollar terms) improved by 2% QoQ for onsite projects and 1% QoQ for offshore services. The management has indicated in the press release that the demand environment is improving and that offshore outsourcing is likely to benefit from the recovery. The company added 32 new clients during the quarter thus taking the total number of active clients to 568.
Among its service lines, Infosys recorded the strongest performance in ‘application development and maintenance' (which grew by 3% QoQ), followed by ‘testing services'. While the former recorded sales growth of 7% QoQ (while accounting for 42% of total sales), the latter grew sales by 8% QoQ (accounting for 7% of total sales). While these low-end services did well, performance remained muted for high-end services like consulting, package implementation and business process management.
Infosys' revenues from the North American market registered a 4% QoQ growth during the quarter. This was though slower than the 9% QoQ growth recorded in the rest of the world segment. Sales from Europe and India increased by 3% QoQ each during the quarter. Based on verticals, Infosys witnessed the strongest performance in the banking and financial services (BFS) vertical which contributed around 35% of its topline for the quarter. Revenue here grw by 6% QoQ. This was followed by manufacturing (19% of the revenue) and telecom (16% of the revenue) verticals. However, the retail and transport industries witnessed a 5% QoQ and 20% QoQ decline in sales.
Infosys recorded a topline growth of 3% QoQ during 3QFY10. This was mainly aided by higher volumes (up 5% QoQ) coupled with an increase in billing rates. As regards volumes, while offshore volumes grew by 6.5% QoQ, onsite volumes grew 5% QoQ. Billing rates (in dollar terms) improved by 2% QoQ for onsite projects and 1% QoQ for offshore services. The management has indicated in the press release that the demand environment is improving and that offshore outsourcing is likely to benefit from the recovery. The company added 32 new clients during the quarter thus taking the total number of active clients to 568.
Among its service lines, Infosys recorded the strongest performance in ‘application development and maintenance' (which grew by 3% QoQ), followed by ‘testing services'. While the former recorded sales growth of 7% QoQ (while accounting for 42% of total sales), the latter grew sales by 8% QoQ (accounting for 7% of total sales). While these low-end services did well, performance remained muted for high-end services like consulting, package implementation and business process management.
Infosys' revenues from the North American market registered a 4% QoQ growth during the quarter. This was though slower than the 9% QoQ growth recorded in the rest of the world segment. Sales from Europe and India increased by 3% QoQ each during the quarter. Based on verticals, Infosys witnessed the strongest performance in the banking and financial services (BFS) vertical which contributed around 35% of its topline for the quarter. Revenue here grw by 6% QoQ. This was followed by manufacturing (19% of the revenue) and telecom (16% of the revenue) verticals. However, the retail and transport industries witnessed a 5% QoQ and 20% QoQ decline in sales.
Infosys added a net of 4,429 employees during 3QFY10. Its total headcount stood at 109,882 at the end of December 2009. The utilisation (excluding trainees) improved from 73.2% in 2QFY10 to 76.2% in 3QFY10. Attrition levels increased to 11.6 % during 3QFY10 as compared to 10.9% during the previous quarter.
Despite a 3.7% appreciation in the rupee against US dollar and increase in sales and marketing expense, Infosys' operating margins expanded by almost 1% QoQ during 3QFY10. This was largely aided higher utilisation levels and containment of general and administrative cost.
Infosys reported a 3% QoQ growth in its net profits during 3QFY10. This was a result of increased volumes and improved billing rates and operating margins.
What to expect?
At the current price of Rs 2,570, the stock is trading at a multiple of 16.5 times our estimated FY12 earnings. The company appears to be inching towards recovery as evident from its 3QFY10 performance and improved business activity in terms of deals and faster decision making. On its just concluded conference call, the management appeared particularly upbeat about exceeding the guidance for the current year. The company plans to hire around 6,000 people in 4QFY10 which might result in pushing the employee cost up. Further the company expects the overall tax rates to go higher in the coming quarters as profits increase at its non-STPI business units. The management expects IT budgets of clients to remain flat for 2010, which is perhaps good news as the downfall is contained. It expects an overall growth of 3.8% and 2.4% in revenues and EPS during FY10. However, fluctuating rupee remains a concern for the company.
The company believes that its strategy to invest in advance training, newer business models and newer markets during the downturn is enabling it to grow rapidly as the recovery has started to take shape. The company's focus on intellectual property, new business models of flexible pricing and operational control are helping it win more repeat business as well as new clients. It applied for 18 process patents in India and the US during 3QFY10, taking its total pending patent applications to 219. The company's performance was bolstered by improved performance from the its subsidiaries like Infosys BPO and Infosys Tech in China, Australia and Mexico.
Saturday, January 9, 2010
Sugar on Fire
Rise in sugar price by 20% in last month to Rs40/kg in Delhi wholesale market is likely to yield significant upside for the sugar companies. Key drivers for sugar price rally are (1) concern of further production shortfall in India owing to restrictions on raw sugar imports (2) poor quality of sugarcane; and (3) surge in international price on poor output in Brazil.
One can look buying good sugar stocks on attractive valuation amidst rising prospect of the tight sugar market lasting until FY11E (YE Sep 2011). Robust profit in Dec09 Q to be reported in Jan 2010 is likely to be the key trigger.
It is learnt from newspaper reports that Uttarpradesh is yet to lift the ban on imports of raw sugar into the state imposed since Nov 2009 in order to protect farmer’s interest. The ban could last until Mar 2010, i.e the end of sugarcane crushing season. At present about 0.7mt of raw sugar is held up at ports including 0.55mt of Bajaj Hindusthan and 0.065mt of Balrampur Chini.
If govt does not allow import during crushing season, then mills will see an increase in cost of production by Rs1/kg and may not be able to import additional quantity, which in turn will affect supply.
Amount of sugar recovered per tonne of cane in Uttarpradesh and Maharashtra in the first three months of current season (Oct09-Dec09) is about 20bp lower y-o-y and total sugar production is flat. This is below the estimate of 11% growth in India’s sugar production to16.2mt driven by 50bp increase in recovery. Lower recovery could lead to about 15mt of sugar production in India, which along with restricted raw sugar import could tighten the supply and drive up price further.
International raw sugar price (SB1 Cmdty) has gone up 25% in last one month following reports of 30% decline in sugar production in Brazil between 16 Nov 2009 and 16 Dec 2009. Recent shift in usage of cane in Brazil in favour of ethanol has further boosted the outlook of tighter sugar supply globally.
Renuka sugar, the largest raw sugar refinery of India, being based out of Karnataka and West Bengal is unaffected by Uttarpradesh’s import ban. We expect Renuka to be the biggest beneficiary of rising sugar price in FY10 owing to its 0.4mt sugar stock at cost of Rs23/kg and contract for another 1.2mt raw sugar.
One can look buying good sugar stocks on attractive valuation amidst rising prospect of the tight sugar market lasting until FY11E (YE Sep 2011). Robust profit in Dec09 Q to be reported in Jan 2010 is likely to be the key trigger.
It is learnt from newspaper reports that Uttarpradesh is yet to lift the ban on imports of raw sugar into the state imposed since Nov 2009 in order to protect farmer’s interest. The ban could last until Mar 2010, i.e the end of sugarcane crushing season. At present about 0.7mt of raw sugar is held up at ports including 0.55mt of Bajaj Hindusthan and 0.065mt of Balrampur Chini.
If govt does not allow import during crushing season, then mills will see an increase in cost of production by Rs1/kg and may not be able to import additional quantity, which in turn will affect supply.
Amount of sugar recovered per tonne of cane in Uttarpradesh and Maharashtra in the first three months of current season (Oct09-Dec09) is about 20bp lower y-o-y and total sugar production is flat. This is below the estimate of 11% growth in India’s sugar production to16.2mt driven by 50bp increase in recovery. Lower recovery could lead to about 15mt of sugar production in India, which along with restricted raw sugar import could tighten the supply and drive up price further.
International raw sugar price (SB1 Cmdty) has gone up 25% in last one month following reports of 30% decline in sugar production in Brazil between 16 Nov 2009 and 16 Dec 2009. Recent shift in usage of cane in Brazil in favour of ethanol has further boosted the outlook of tighter sugar supply globally.
Renuka sugar, the largest raw sugar refinery of India, being based out of Karnataka and West Bengal is unaffected by Uttarpradesh’s import ban. We expect Renuka to be the biggest beneficiary of rising sugar price in FY10 owing to its 0.4mt sugar stock at cost of Rs23/kg and contract for another 1.2mt raw sugar.
Friday, January 8, 2010
Q3 FY10 Earning Preview
A strong recovery in domestic cyclicals, mixed performance of defensives and divergence amongst global cyclicals will mark the 3Q reporting season, beginning this Friday. Overall profits for Sensex as well as for our universe would be up 27-29% YoY, on our estimates.
• While headline profit growth would be flattered by the year-ago period’s low base (profits had dropped 14% YoY in 3QFY09 for our coverage), an acceleration in revenue growth (to ~20% from sub 5% in the previous three quarters) too would contribute to strong profit growth.
• Beyond YoY comparisons, absolute profits (as well as EBITDA) during the quarter will likely be 10-20% higher than even 3QFY08 levels for our universe. Sequentially (QoQ), aggregate profits are likely to have grown for the fourth consecutive quarter, with revenues growing for the second consecutive quarter.
• All sectors, save four (Capital Goods, Cement, IT Services, Financials), would likely report acceleration in YoY profit growth from the previous quarter. Also, all sectors except five are likely to report double-digit profit growth.
• Autos and Commodities, two sectors that were the first to be hit by the slowdown last year, will likely report the strongest growth and be the biggest contributors to growth during 3QFY10; we reckon they would contribute over three fourths of our universe’s profit growth. These two sectors will also contribute over two thirds of the quarter’s revenue growth.
• Domestic consumption-linked sectors will show continued momentum. We expect Auto sector to maintain margins sequentially as higher commodity costs are offset by operating leverage and better product mix. Revival in urban demand will buoy results of retailers which will report modest acceleration in revenues and sharp uptick in profits as Shoppers Stop reports a profit from loss in December 2008 quarter. Same store sales could exceed 40-50% in some formats for Pantaloon during the quarter.
• Capital Goods, Telecom and Financials will be the laggards during the quarter. The decline in Capital Goods would be due to last year’s extraordinary gains at L&T (otherwise it will likely report strong operating performance). The Telecom sector will likely report deterioration in core performance as well, as increased competition takes its toll. Lower trading income and weak credit growth will hurt financials results.
• While headline profit growth would be flattered by the year-ago period’s low base (profits had dropped 14% YoY in 3QFY09 for our coverage), an acceleration in revenue growth (to ~20% from sub 5% in the previous three quarters) too would contribute to strong profit growth.
• Beyond YoY comparisons, absolute profits (as well as EBITDA) during the quarter will likely be 10-20% higher than even 3QFY08 levels for our universe. Sequentially (QoQ), aggregate profits are likely to have grown for the fourth consecutive quarter, with revenues growing for the second consecutive quarter.
• All sectors, save four (Capital Goods, Cement, IT Services, Financials), would likely report acceleration in YoY profit growth from the previous quarter. Also, all sectors except five are likely to report double-digit profit growth.
• Autos and Commodities, two sectors that were the first to be hit by the slowdown last year, will likely report the strongest growth and be the biggest contributors to growth during 3QFY10; we reckon they would contribute over three fourths of our universe’s profit growth. These two sectors will also contribute over two thirds of the quarter’s revenue growth.
• Domestic consumption-linked sectors will show continued momentum. We expect Auto sector to maintain margins sequentially as higher commodity costs are offset by operating leverage and better product mix. Revival in urban demand will buoy results of retailers which will report modest acceleration in revenues and sharp uptick in profits as Shoppers Stop reports a profit from loss in December 2008 quarter. Same store sales could exceed 40-50% in some formats for Pantaloon during the quarter.
• Capital Goods, Telecom and Financials will be the laggards during the quarter. The decline in Capital Goods would be due to last year’s extraordinary gains at L&T (otherwise it will likely report strong operating performance). The Telecom sector will likely report deterioration in core performance as well, as increased competition takes its toll. Lower trading income and weak credit growth will hurt financials results.
Tuesday, January 5, 2010
Gold Bull
Gold prices are on upswing. They are going up at the moment slowly due to rising loss of confidence of the Investors in paper currencies and also people at large. Gold is going up not because of hedge against inflation – no one consciously buy this metal with inflation in mind. Have you ever gone to a jeweler’s or gold shop to buy the gold as hedge against inflation? Definitely not.
The analysts and media who have been touting rise in gold as investor’s intention to hedge against inflation must get their head and speech examined. They have been spreading LIE at the instance of the officials of respective governments. With the loss of confidence resulting in steep decline of US dollar, the US administration has been reiterating its oft repeated stance of strong dollar policy; and when the world is not listening to buy the bankrupt dollar, they have been using media and analysts to tell the world NOT to buy gold, adding that gold market is in bubble which is going to burst one day.
Anything will burst one day. Everyone will die one day. Does it mean that we should leave our desire to live and enjoy our life? It is nature’s cycle that what is borne today will die one day; and what is falling or rising one day will rise and fall one day. It is the eternal truth. We do not have to go to the Harvard or Wharton to learn that. This is the parental heritage.
Yes, Gold and Silver have been rising due to investor’s preference to get away from paper assets to something real. They no longer treat Real Estate as really a Real wealth! This is why they are turning to Gold. Gold is GOD, Gold is Truth, and in India there is official state Sanskrit symbol “Satya Mev Jayte” that means “Truth Alone Wins”.
This is the reason that even an illiterate Indian is buying gold all the time. He is not illiterate, today’s Bankers, Investment Bankers, Insurers, Central Bankers, Finance Ministers, Governors are. How do you measure the actions of all Central Bankers, including that of George Brown, the Prime Minister of UK who was the Chancellor of HM Treasury, sold Gold at the bottom of the cycle - $ 260 to $320? Almost all Central Banks sold over 3000 tons of gold at the rock bottom prices during last 15 years.
What the World Doesn’t Know
..Is the hidden the fact that “United States has lost almost all of its Gold during its covert practice for over 20 years”. YES, the gold may be there physically at Fort Knox or HSBC Bullion Vault in USA. But that is NOT enough. Who owns the gold is more important than who keeps the gold. It is like your goods are in a warehouse or bank locker. The warehouse-keeper or banker can not claim Title to or Ownership of those goods. These goods are kept with him in Trust.
The FED and Treasury appear to have been concealing lending of gold to hedge funds by
camouflaging transactions through various central banks. When those Central Banks lend to these hedge funds to short the gold, they appear to claim the gold from Fed and Treasury who earmark the gold in its balance sheets. In other words, the earmarked gold shown in Fed / Treasury balance sheets is in fact owned by foreign Central Bankers and is no longer owned by the United States. If the shorted gold does not return to Fed/Treasury, they will be obliged to show it as “sale” one day. That day of reckoning will come when the Foreign Central Banks start demanding the gold physically.
When the Truth will come out?
If there is a massive call from the States and Local Governments like California to launch a
campaign against the Fed/Treasury to give them enough funds by selling part of existing gold reserve of 8134 tons, will meet with the denials from US Administration (Fed /Treasury) on evasive grounds.
Both Fed/Treasury know pretty well that there is no real gold ownership left with them, and that selling of gold belonging to other nations would tantamount to committing breach of trust. Even the President of United States, be it were President Clinton, George Bush or Barack Obama, may not be aware of the constructive loss of US Gold through the hedgers who acted solely at the behest of same Fed/Treasury officials having ulterior motive.
The analysts and media who have been touting rise in gold as investor’s intention to hedge against inflation must get their head and speech examined. They have been spreading LIE at the instance of the officials of respective governments. With the loss of confidence resulting in steep decline of US dollar, the US administration has been reiterating its oft repeated stance of strong dollar policy; and when the world is not listening to buy the bankrupt dollar, they have been using media and analysts to tell the world NOT to buy gold, adding that gold market is in bubble which is going to burst one day.
Anything will burst one day. Everyone will die one day. Does it mean that we should leave our desire to live and enjoy our life? It is nature’s cycle that what is borne today will die one day; and what is falling or rising one day will rise and fall one day. It is the eternal truth. We do not have to go to the Harvard or Wharton to learn that. This is the parental heritage.
Yes, Gold and Silver have been rising due to investor’s preference to get away from paper assets to something real. They no longer treat Real Estate as really a Real wealth! This is why they are turning to Gold. Gold is GOD, Gold is Truth, and in India there is official state Sanskrit symbol “Satya Mev Jayte” that means “Truth Alone Wins”.
This is the reason that even an illiterate Indian is buying gold all the time. He is not illiterate, today’s Bankers, Investment Bankers, Insurers, Central Bankers, Finance Ministers, Governors are. How do you measure the actions of all Central Bankers, including that of George Brown, the Prime Minister of UK who was the Chancellor of HM Treasury, sold Gold at the bottom of the cycle - $ 260 to $320? Almost all Central Banks sold over 3000 tons of gold at the rock bottom prices during last 15 years.
What the World Doesn’t Know
..Is the hidden the fact that “United States has lost almost all of its Gold during its covert practice for over 20 years”. YES, the gold may be there physically at Fort Knox or HSBC Bullion Vault in USA. But that is NOT enough. Who owns the gold is more important than who keeps the gold. It is like your goods are in a warehouse or bank locker. The warehouse-keeper or banker can not claim Title to or Ownership of those goods. These goods are kept with him in Trust.
The FED and Treasury appear to have been concealing lending of gold to hedge funds by
camouflaging transactions through various central banks. When those Central Banks lend to these hedge funds to short the gold, they appear to claim the gold from Fed and Treasury who earmark the gold in its balance sheets. In other words, the earmarked gold shown in Fed / Treasury balance sheets is in fact owned by foreign Central Bankers and is no longer owned by the United States. If the shorted gold does not return to Fed/Treasury, they will be obliged to show it as “sale” one day. That day of reckoning will come when the Foreign Central Banks start demanding the gold physically.
When the Truth will come out?
If there is a massive call from the States and Local Governments like California to launch a
campaign against the Fed/Treasury to give them enough funds by selling part of existing gold reserve of 8134 tons, will meet with the denials from US Administration (Fed /Treasury) on evasive grounds.
Both Fed/Treasury know pretty well that there is no real gold ownership left with them, and that selling of gold belonging to other nations would tantamount to committing breach of trust. Even the President of United States, be it were President Clinton, George Bush or Barack Obama, may not be aware of the constructive loss of US Gold through the hedgers who acted solely at the behest of same Fed/Treasury officials having ulterior motive.
Prism Cement:Q3FY10 Result Update
Prism Cement on Tuesday reported a 35.25 per cent growth in its net profit at Rs 41.97 cr for the third quarter ended December 31, 2009, over the corresponding period a year earlier.
Net sales of the company rose to Rs 229.97 cr in the latest quarter of the current fiscal from Rs 214.79 cr of the year—ago period. For the nine—month period that ended in December, Prism Cement posted a net profit of Rs 151.19 cr, up 41.27 per cent, aga inst Rs 107.02 cr. Shares of Prism Cement closed at Rs 51.50, up by 1.58 per cent, from its previous close on the BSE.
Net sales of the company rose to Rs 229.97 cr in the latest quarter of the current fiscal from Rs 214.79 cr of the year—ago period. For the nine—month period that ended in December, Prism Cement posted a net profit of Rs 151.19 cr, up 41.27 per cent, aga inst Rs 107.02 cr. Shares of Prism Cement closed at Rs 51.50, up by 1.58 per cent, from its previous close on the BSE.
Saturday, January 2, 2010
Risk & Uncertainty in 2010
There have been five overriding themes for our investment letters during the past year.
Below we list and review them.
1) Expanding liquidity drives financial markets, particularly when it occurs in the face of a sub-par but recovering economy and weak price inflation. This is the sweet spot in the cycle we so often talk about, and it is the best of all times for stock and corporate bond prices when perception of risk abates.
2) The Great Reflation underway since late 2008 has done its first job - aborted what surely would have been a full scale depression at least on the scale of the 1930s. That was Act I.
3) No one should believe that the huge reflation underway will make the economy and financial system whole again. The private sector debt excesses were far greater by 2008 than they were in 1929. A good part of the reflation effort is to transform private debt into public debt, and this will surely create another, different debt monster. As the year draws to a close, credit rating agencies are starting to downgrade sovereign debt and credit default swaps (CDSs) and are showing increased concern that some major developed countries are going to have problems servicing their debt (e.g. Japan, U.S., etc.). The markets are starting to tell us that Governments with brittle, over-extended fiscal positions will soon have to put in place credible fiscal consolidation -- tax increases, expenditure cuts, decline in services, etc. This means more deflation, more uncertainty.
4) Zero interest rates in the U.S. together with Federal Reserve asset purchases, much of it low quality, has done its job of inflating asset prices which improves balance sheets. Better financial markets greatly help capital raising ability, further strengthening balance sheets. As a result, they are much improved. The question is over sustainability. Fears of renewed asset bubbles have surfaced, complicating Fed and other central bank decision making. Do they risk tightening too soon or too late? Does a middle ground exist? Zero interest rates are an extreme anomaly and cannot last unless the U.S. economy remains permanently depressed and in deflation like Japan has been for 20 years. This seems unlikely but cannot be ruled out.
5) The great flaw in the international monetary system has allowed the U.S. - the key reserve currency country in the world - to run up a $4 trillion tab with foreign central banks and has created excess liquidity and asset bubbles in countries buying those dollars. It has also contributed mightily to the destruction of savings and investment in the U.S., and has created massive disequilibria in the global economy and financial system. Economics 101 tells us clearly that all disequilibria eventually get corrected. The interesting questions are how and when? That will be the story for Act II of the drama and it hasn’t been written yet.
As the year 2009 draws to a close, there is clearly an aura of unreality. We barely survived a near-death experience nine months ago. However, the pain and the fear for most people were brief. It was not like the 10-year depression in the 1930s that changed attitudes for two generations.
Below we list and review them.
1) Expanding liquidity drives financial markets, particularly when it occurs in the face of a sub-par but recovering economy and weak price inflation. This is the sweet spot in the cycle we so often talk about, and it is the best of all times for stock and corporate bond prices when perception of risk abates.
2) The Great Reflation underway since late 2008 has done its first job - aborted what surely would have been a full scale depression at least on the scale of the 1930s. That was Act I.
3) No one should believe that the huge reflation underway will make the economy and financial system whole again. The private sector debt excesses were far greater by 2008 than they were in 1929. A good part of the reflation effort is to transform private debt into public debt, and this will surely create another, different debt monster. As the year draws to a close, credit rating agencies are starting to downgrade sovereign debt and credit default swaps (CDSs) and are showing increased concern that some major developed countries are going to have problems servicing their debt (e.g. Japan, U.S., etc.). The markets are starting to tell us that Governments with brittle, over-extended fiscal positions will soon have to put in place credible fiscal consolidation -- tax increases, expenditure cuts, decline in services, etc. This means more deflation, more uncertainty.
4) Zero interest rates in the U.S. together with Federal Reserve asset purchases, much of it low quality, has done its job of inflating asset prices which improves balance sheets. Better financial markets greatly help capital raising ability, further strengthening balance sheets. As a result, they are much improved. The question is over sustainability. Fears of renewed asset bubbles have surfaced, complicating Fed and other central bank decision making. Do they risk tightening too soon or too late? Does a middle ground exist? Zero interest rates are an extreme anomaly and cannot last unless the U.S. economy remains permanently depressed and in deflation like Japan has been for 20 years. This seems unlikely but cannot be ruled out.
5) The great flaw in the international monetary system has allowed the U.S. - the key reserve currency country in the world - to run up a $4 trillion tab with foreign central banks and has created excess liquidity and asset bubbles in countries buying those dollars. It has also contributed mightily to the destruction of savings and investment in the U.S., and has created massive disequilibria in the global economy and financial system. Economics 101 tells us clearly that all disequilibria eventually get corrected. The interesting questions are how and when? That will be the story for Act II of the drama and it hasn’t been written yet.
As the year 2009 draws to a close, there is clearly an aura of unreality. We barely survived a near-death experience nine months ago. However, the pain and the fear for most people were brief. It was not like the 10-year depression in the 1930s that changed attitudes for two generations.
First Quarter 2010
In this, our inaugural World Economic Quarterly (WEQ), we focus on the G10 and E10 countries. Our G10 and E10 groups are defined as the top ten countries by gross domestic product (gdp) in each segment. The rest of the world is also analysed, but in less detail. Our approach is to recognise that investors want to focus on the fastest growing, and largest, of the world’s economies, but at the same time not lose touch with what is occurring in other parts of the world. Many countries in the latter are also fast-growing and are as instrumental in the reshaping of the world economy that is underway.
Two decades or so ago, the developed economies accounted for over two-thirds of global gdp, by 2006 this fell closer to one-half and on current trends it will fall to around one-third by 2020. That is a measure of the pace at which the global economy is evolving and why there needs to be focused research and analysis of the opportunities and challenges this opens up for companies. In this publication, we focus on the economic and financial market implications of this rapid change over the next two years.
The overall theme is that 2010 will be a year of global economic recovery after the deepest downturn since the Great Depression. However, the effects of the policy loosening that has led to recovery will also be felt for many years.
Financial market themes in this Quarterly
1. US dollar to rally against its main trading counterparts
Among our G10 advanced economy grouping, we look for the US to record the fastest pace of economic growth in 2010. A more rapid closure of its output gap should see the US Federal Reserve raising interest rates well before the ECB, BoJ and BoE. This is likely to support the US dollar going forward. In addition, we feel that the dollar will soon start to benefit from stronger US economic fundamentals as the theme of a dollar-positive response to risk aversion fades on a better-established global recovery.
2. Emerging Asian currencies to extend gains in 2010
The main impetus to global economic recovery will continue to come from emerging markets in 2010, notably in emerging Asia. Assuming only a limited risk that activity in China slows in response to rising bad debts after the recent surge in bank lending, the orientation of emerging East Asian economies towards export-led activity should propel global growth. Relatively faster growth and accelerating inflation pressures (related to rising commodity prices) should see some emerging market central banks raise interest rates from early 2010, benefiting their currencies. But some (East European) emerging markets are in a different position, with interest rates likely to be lowered further now that the risk of currency collapse has been reduced (often as a result of IMF bail-outs). Hungary is one such example.
3. Divergent economic performances to keep volatility high
Notwithstanding our central view of a return to global economic growth, starkly divergent performances across countries will almost certainly feature in 2010. This may be a source of uncertainty and volatility in financial markets. As noted above, some emerging market economies - particularly those dependent on external financing - may experience difficulties in the form of additional currency weakness and/or higher bond yields. Equally, confirmation that the rally in ‘riskier’ assets seen since March is sustainable could fuel a further rebound in equities and commodities with government bonds falling out of favour. Given the challenging fiscal backdrop in many countries at the moment, rising government bond yields and tougher financing conditions represent a potentially significant downside risk to the global outlook.
4. Inflation pressures of increasing concern for central banks
At first glance, the excess spare capacity created by deep recessions in various economies points to subdued inflation pressures going forward. In economics jargon, aggregate supply exceeds aggregate demand. But under these conditions, inflation pressures will only be muted if inflation expectations are under control. At the current juncture, there is a risk that these expectations start to become elevated. First, inflation rates in many countries are poised to accelerate in the short term as energy price declines in the previous year fall from the annual comparison. Second, central banks around the world may keep so-called ‘unconventional’ monetary policy measures in place for too long (or unwind them too slowly). And third, the nature of the economic and financial crisis means that supply potential in many countries will have been partially destroyed, so adding to inflation pressures. All of these indicate potentially significant upward pressure on government bond and swap yields over our forecast horizon.
5. De-leveraging holds the key for the US dollar longer term
While our central view is for the US dollar’s trade-weighted exchange rate to appreciate into next year, the medium to longer-term outlook may be rather different. If private and public sector de-leveraging is too slow (or non-existent), the US will run large current account deficits well into the future - a structural drag on the US dollar. Our latest forecasts show the US current account deficit narrowing to 3.2% of gdp in 2009, from a shortfall of 4.9% in 2008 but then widening back to a similar level by 2013. Given that progress is likely to be only gradual, it is not inconceivable that financial markets turn their attention to the theme of wider external deficits quite quickly.
Courtesy: Nirmal Bang
Two decades or so ago, the developed economies accounted for over two-thirds of global gdp, by 2006 this fell closer to one-half and on current trends it will fall to around one-third by 2020. That is a measure of the pace at which the global economy is evolving and why there needs to be focused research and analysis of the opportunities and challenges this opens up for companies. In this publication, we focus on the economic and financial market implications of this rapid change over the next two years.
The overall theme is that 2010 will be a year of global economic recovery after the deepest downturn since the Great Depression. However, the effects of the policy loosening that has led to recovery will also be felt for many years.
Financial market themes in this Quarterly
1. US dollar to rally against its main trading counterparts
Among our G10 advanced economy grouping, we look for the US to record the fastest pace of economic growth in 2010. A more rapid closure of its output gap should see the US Federal Reserve raising interest rates well before the ECB, BoJ and BoE. This is likely to support the US dollar going forward. In addition, we feel that the dollar will soon start to benefit from stronger US economic fundamentals as the theme of a dollar-positive response to risk aversion fades on a better-established global recovery.
2. Emerging Asian currencies to extend gains in 2010
The main impetus to global economic recovery will continue to come from emerging markets in 2010, notably in emerging Asia. Assuming only a limited risk that activity in China slows in response to rising bad debts after the recent surge in bank lending, the orientation of emerging East Asian economies towards export-led activity should propel global growth. Relatively faster growth and accelerating inflation pressures (related to rising commodity prices) should see some emerging market central banks raise interest rates from early 2010, benefiting their currencies. But some (East European) emerging markets are in a different position, with interest rates likely to be lowered further now that the risk of currency collapse has been reduced (often as a result of IMF bail-outs). Hungary is one such example.
3. Divergent economic performances to keep volatility high
Notwithstanding our central view of a return to global economic growth, starkly divergent performances across countries will almost certainly feature in 2010. This may be a source of uncertainty and volatility in financial markets. As noted above, some emerging market economies - particularly those dependent on external financing - may experience difficulties in the form of additional currency weakness and/or higher bond yields. Equally, confirmation that the rally in ‘riskier’ assets seen since March is sustainable could fuel a further rebound in equities and commodities with government bonds falling out of favour. Given the challenging fiscal backdrop in many countries at the moment, rising government bond yields and tougher financing conditions represent a potentially significant downside risk to the global outlook.
4. Inflation pressures of increasing concern for central banks
At first glance, the excess spare capacity created by deep recessions in various economies points to subdued inflation pressures going forward. In economics jargon, aggregate supply exceeds aggregate demand. But under these conditions, inflation pressures will only be muted if inflation expectations are under control. At the current juncture, there is a risk that these expectations start to become elevated. First, inflation rates in many countries are poised to accelerate in the short term as energy price declines in the previous year fall from the annual comparison. Second, central banks around the world may keep so-called ‘unconventional’ monetary policy measures in place for too long (or unwind them too slowly). And third, the nature of the economic and financial crisis means that supply potential in many countries will have been partially destroyed, so adding to inflation pressures. All of these indicate potentially significant upward pressure on government bond and swap yields over our forecast horizon.
5. De-leveraging holds the key for the US dollar longer term
While our central view is for the US dollar’s trade-weighted exchange rate to appreciate into next year, the medium to longer-term outlook may be rather different. If private and public sector de-leveraging is too slow (or non-existent), the US will run large current account deficits well into the future - a structural drag on the US dollar. Our latest forecasts show the US current account deficit narrowing to 3.2% of gdp in 2009, from a shortfall of 4.9% in 2008 but then widening back to a similar level by 2013. Given that progress is likely to be only gradual, it is not inconceivable that financial markets turn their attention to the theme of wider external deficits quite quickly.
Courtesy: Nirmal Bang
Will Higher Inflation Lead to Monetary Tightening??
Since March, India has been experiencing a clear rise in inflation, primarily, but not exclusively, linked to the increase in food prices. While official forecasts for GDP growth and inflation were revised upwards in October and the stock market registered very robust growth (+120% since March), the issue of a monetary restraint has become a topic for debate.
Yet, it must be recalled that monetary management in India is strongly linked to the funding requirements of the public sector, which have risen sharply this year, and is unfettered by an inflation target. Apart from the negative effect that an increase in funding cost would have on public finances, the RBI must also consider the effect that an interest rate hike could have on the volume of foreign capital inflows. A surge in foreign capital influx into India to take advantage of the interest rate differential would place additional appreciating pressure on the Indian rupee while the current account deficit continues to expand again.
The direction taken by monetary policy will depend on the arbitrage between public sector funding requirements, a stable exchange rate and stable prices, an objective that will most probably continue to be subordinated to the first two, which would therefore leave scant room for monetary tightening.
Upward-bound Inflation
Since March 2009, India has been experiencing a clear rise in consumer prices up by 11% (YoY) in October, as well as wholesale prices, for which the annual growth stood at 4.8% in November (versus 1.3 in October, chart 1). The spread between the CPI and wholesale price can be primarily explained by the weight of food in the basket comprising the IPC. Food prices rose sharply due to a disappointing monsoon between April and August 2009 (mostly in the northern part of the country, where the level of rainfall was the lowest recorded since 1972 and less than 22% of the historic average) resulting in a meager harvest. The prices of sugar, potatoes, onions, rice, peanuts, and many other foods rose sharply.
There is, however, a general trend towards rising prices in India, (perhaps with the sole exception of textile products). The relatively low level of savings in the country (comparatively to China and other Asian countries) means less accumulated capital while the growth rate has become very high (like in China) resulting in pressure on production capacities. While most countries in the world are currently faced with excessive supply of goods, which theoretically rules out a return to inflation despite the monetization of public deficits and monetization of the purchase of foreign exchange reserves (notably in China and commodity exporters countries), inflation in India has surged higher than in other places. India begins gradual exit from soft monetary policy While the official growth forecasts were gradually revised upwards to 7% for the fiscal year ending in March 2010, and the Reserve Bank of India (RBI) has corrected its inflation anticipations (6.5% for the year 2009/10 in October versus 5% in March), the issue of a tougher monetary policy has become a topic for debate.
The RBI continues to maintain its repo rate at 4.75% and its reverse repo rate at 3.25% since April 2009 but has raised the statutory reserve ratio of commercial banks from 24% to 25%, a measure in effect since November 8.
An additional toughening would curb the development of bubbles on financial asset prices – already significantly up since April (the stock market gained 117% between March and December, chart 2) and the widespread increase in the prices of non-food assets. On the other hand, a tougher monetary policy cannot halt rising food prices, mostly caused by the scarcity of food supplies.
It should be noted as well that the interest rate is not the principal monetary policy instrument (the RBI’s main target being the growth of monetary aggregates). As the monetary market is mostly adjusted by “quantities”, interbank loans are often made outside the corridor constituted by the RBI’s repo transaction rates (chart 3). This means that interest rate movements only partially reflect the direction of monetary policy.
Yet, it must be recalled that monetary management in India is strongly linked to the funding requirements of the public sector, which have risen sharply this year, and is unfettered by an inflation target. Apart from the negative effect that an increase in funding cost would have on public finances, the RBI must also consider the effect that an interest rate hike could have on the volume of foreign capital inflows. A surge in foreign capital influx into India to take advantage of the interest rate differential would place additional appreciating pressure on the Indian rupee while the current account deficit continues to expand again.
The direction taken by monetary policy will depend on the arbitrage between public sector funding requirements, a stable exchange rate and stable prices, an objective that will most probably continue to be subordinated to the first two, which would therefore leave scant room for monetary tightening.
Upward-bound Inflation
Since March 2009, India has been experiencing a clear rise in consumer prices up by 11% (YoY) in October, as well as wholesale prices, for which the annual growth stood at 4.8% in November (versus 1.3 in October, chart 1). The spread between the CPI and wholesale price can be primarily explained by the weight of food in the basket comprising the IPC. Food prices rose sharply due to a disappointing monsoon between April and August 2009 (mostly in the northern part of the country, where the level of rainfall was the lowest recorded since 1972 and less than 22% of the historic average) resulting in a meager harvest. The prices of sugar, potatoes, onions, rice, peanuts, and many other foods rose sharply.
There is, however, a general trend towards rising prices in India, (perhaps with the sole exception of textile products). The relatively low level of savings in the country (comparatively to China and other Asian countries) means less accumulated capital while the growth rate has become very high (like in China) resulting in pressure on production capacities. While most countries in the world are currently faced with excessive supply of goods, which theoretically rules out a return to inflation despite the monetization of public deficits and monetization of the purchase of foreign exchange reserves (notably in China and commodity exporters countries), inflation in India has surged higher than in other places. India begins gradual exit from soft monetary policy While the official growth forecasts were gradually revised upwards to 7% for the fiscal year ending in March 2010, and the Reserve Bank of India (RBI) has corrected its inflation anticipations (6.5% for the year 2009/10 in October versus 5% in March), the issue of a tougher monetary policy has become a topic for debate.
The RBI continues to maintain its repo rate at 4.75% and its reverse repo rate at 3.25% since April 2009 but has raised the statutory reserve ratio of commercial banks from 24% to 25%, a measure in effect since November 8.
An additional toughening would curb the development of bubbles on financial asset prices – already significantly up since April (the stock market gained 117% between March and December, chart 2) and the widespread increase in the prices of non-food assets. On the other hand, a tougher monetary policy cannot halt rising food prices, mostly caused by the scarcity of food supplies.
It should be noted as well that the interest rate is not the principal monetary policy instrument (the RBI’s main target being the growth of monetary aggregates). As the monetary market is mostly adjusted by “quantities”, interbank loans are often made outside the corridor constituted by the RBI’s repo transaction rates (chart 3). This means that interest rate movements only partially reflect the direction of monetary policy.
What Will Happen if the Oil Price Falls to USD 40 per Barrel again 2010?
One should absolutely not underestimate the possibility that the oil price will fall to USD 40 per barrel again in 2010: growth in OECD countries will decline significantly from its 2009 trend; the speculative oil stockpiles may shrink; there is still enormous excess production capacity and OPEC’s discipline may disappear if oil prices start to fall.
The effects of far less expensive oil in 2010 are known: stimulation of consumption, but negative inflation again in OECD countries, and therefore extension of the period of highly expansionary monetary policy since consumption will remain sluggish; difficulties for some oil-producing countries: Russia, Iran, Venezuela; appreciation of the dollar against the euro.
1. It is entirely possible that the oil price will slip back (to USD 40 per barrel??) in 2010.
2. What would happen if the oil price fell back to USD 40 per barrel in 2010?
The consequences of a low oil price again in 2010 are quite clear:
a) Stimulation of consumption in OECD countries, as in the second half of 2008 and at the beginning of 2009, by the fall in energy prices, and hence a decline in inflation (Charts 8A and B), which bolsters real wages (Chart 8C).
b) As inflation will become very low again and growth will be very modest, despite the fall in the oil price, monetary policies in OECD countries are likely to remain highly expansionary.
c) Oil-producing countries that need a high oil price to balance their budgets (Russia, Venezuela, Iran, Chart 10A) will again face problems.
d) Pick-up in the dollar against the euro; it is well known that when the oil price is high, the dollar depreciates against the euro (Chart 11); this is in all likelihood accounted for by the fact that oil-producing countries invest a substantial part of their dollar-denominated oil revenues in euros.
Courtesy: Nirmal Bang
The effects of far less expensive oil in 2010 are known: stimulation of consumption, but negative inflation again in OECD countries, and therefore extension of the period of highly expansionary monetary policy since consumption will remain sluggish; difficulties for some oil-producing countries: Russia, Iran, Venezuela; appreciation of the dollar against the euro.
1. It is entirely possible that the oil price will slip back (to USD 40 per barrel??) in 2010.
2. What would happen if the oil price fell back to USD 40 per barrel in 2010?
The consequences of a low oil price again in 2010 are quite clear:
a) Stimulation of consumption in OECD countries, as in the second half of 2008 and at the beginning of 2009, by the fall in energy prices, and hence a decline in inflation (Charts 8A and B), which bolsters real wages (Chart 8C).
b) As inflation will become very low again and growth will be very modest, despite the fall in the oil price, monetary policies in OECD countries are likely to remain highly expansionary.
c) Oil-producing countries that need a high oil price to balance their budgets (Russia, Venezuela, Iran, Chart 10A) will again face problems.
d) Pick-up in the dollar against the euro; it is well known that when the oil price is high, the dollar depreciates against the euro (Chart 11); this is in all likelihood accounted for by the fact that oil-producing countries invest a substantial part of their dollar-denominated oil revenues in euros.
Courtesy: Nirmal Bang
Why Are Banks Holding So Many Excess Reserves
The buildup of reserves in the U.S. banking system during the financial crisis has fueled concerns that the Federal Reserve’s policies may have failed to stimulate the fl ow of credit in the economy: banks, it appears, are amassing funds rather than lending them out. However, a careful examination of the balance sheet effects of central bank actions shows that the high level of reserves is simply a by-product of the Fed’s new lending facilities and asset purchase programs. The total quantity of reserves in the banking system refl ects the scale of the Fed’s policy initiatives, but conveys no information about the initiatives’ effects on bank lending or on the economy more broadly.
The quantity of reserves in the U.S. banking system has grown dramatically over the course of the fi nancial crisis. Reserves are funds held by a bank, either as balances on deposit at the Federal Reserve or as cash in the bank’s vault or ATMs, that can be used to meet the bank’s legal reserve requirement. The level of reserves began to rise following the collapse of Lehman Brothers in mid- September 2008, climbing from roughly $45 billion to more than $900 billion by January 2009 (see the chart on page 2). While required reserves—funds that are actually used to fulfi ll a bank’s legal requirement—grew modestly over this period, this increase was dwarfed by the large and unprecedented rise in the additional balances held, or excess reserves.
Some commentators see the surge in excess reserves as a troubling development— evidence that banks are hoarding funds rather than lending them out to households, fi rms, and other banks. Edlin and Jaffee (2009, p. 2), for example, identify the high level of excess reserves as the “problem” behind the continuing credit crunch—or, “if not the problem, one heckuva symptom.” Other observers see the large increase in excess reserves as a sign that many of the steps taken by the Federal Reserve during the crisis have been ineffective. Instead of restoring the fl ow of credit to fi rms and households, they argue, the money the Fed has lent to banks and other fi nancial intermediaries since September 2008 is sitting idle in banks’ reserve accounts.
These views have led to proposals aimed at discouraging banks from holding excess reserves. The proposals include placing a tax on excess reserves (Sumner 2009) or setting a cap on the amount of excess reserves each bank is allowed to hold (Dasgupta 2009). Mankiw (2009) notes that economists in earlier eras also criticized the stockpiling of money during times of fi nancial stress and favored a tax on money holdings to encourage lending. Relating these past issues to the current situation, he remarks that “with banks now holding substantial excess reserves, [this historical] concern about cash hoarding suddenly seems very modern.”
In this edition of Current Issues, we argue that the concerns about high levels of reserves are largely unwarranted. Using a series of simple examples, we show how central bank liquidity facilities and other credit programs create—essentially as a by-product—a large quantity of reserves. While the level of required reserves may change modestly with changes in bank lending behavior, the vast majority of the newly created reserves will end up being held as excess reserves regardless negligible. This process has clearly not taken place. After presenting our examples, we explain why the money multiplier is inoperative in the current environment, where reserves have increased to unprecedented levels and the Federal Reserve has begun paying interest on those reserves. We also argue that a large increase in the quantity of reserves in the banking system need not be infl ationary, since the central bank can adjust short-term interest rates independently of the level of reserves by changing the interest rate it pays on reserves.
Central Bank Lending: A Simple Example
To clarify how the types of policies implemented by the Federal Reserve over the course of the financial crisis affect individual banks’ balance sheets and the level of reserves in the banking system as a whole, we present a simple example. Consider the balance sheets of two banks, labeled A and B (Exhibit 1). Focus fi rst on the items in black. On the liabilities side of the balance sheet, each bank has started with $10 of capital and has taken in $100 in deposits. On the asset side of the balance sheet, both banks hold reserves and make loans. For simplicity, we assume that the banks are required to hold reserves equaling 10 percent of their deposits, and that each bank holds exactly $10 in reserves.
The quantity of reserves in the U.S. banking system has grown dramatically over the course of the fi nancial crisis. Reserves are funds held by a bank, either as balances on deposit at the Federal Reserve or as cash in the bank’s vault or ATMs, that can be used to meet the bank’s legal reserve requirement. The level of reserves began to rise following the collapse of Lehman Brothers in mid- September 2008, climbing from roughly $45 billion to more than $900 billion by January 2009 (see the chart on page 2). While required reserves—funds that are actually used to fulfi ll a bank’s legal requirement—grew modestly over this period, this increase was dwarfed by the large and unprecedented rise in the additional balances held, or excess reserves.
Some commentators see the surge in excess reserves as a troubling development— evidence that banks are hoarding funds rather than lending them out to households, fi rms, and other banks. Edlin and Jaffee (2009, p. 2), for example, identify the high level of excess reserves as the “problem” behind the continuing credit crunch—or, “if not the problem, one heckuva symptom.” Other observers see the large increase in excess reserves as a sign that many of the steps taken by the Federal Reserve during the crisis have been ineffective. Instead of restoring the fl ow of credit to fi rms and households, they argue, the money the Fed has lent to banks and other fi nancial intermediaries since September 2008 is sitting idle in banks’ reserve accounts.
These views have led to proposals aimed at discouraging banks from holding excess reserves. The proposals include placing a tax on excess reserves (Sumner 2009) or setting a cap on the amount of excess reserves each bank is allowed to hold (Dasgupta 2009). Mankiw (2009) notes that economists in earlier eras also criticized the stockpiling of money during times of fi nancial stress and favored a tax on money holdings to encourage lending. Relating these past issues to the current situation, he remarks that “with banks now holding substantial excess reserves, [this historical] concern about cash hoarding suddenly seems very modern.”
In this edition of Current Issues, we argue that the concerns about high levels of reserves are largely unwarranted. Using a series of simple examples, we show how central bank liquidity facilities and other credit programs create—essentially as a by-product—a large quantity of reserves. While the level of required reserves may change modestly with changes in bank lending behavior, the vast majority of the newly created reserves will end up being held as excess reserves regardless negligible. This process has clearly not taken place. After presenting our examples, we explain why the money multiplier is inoperative in the current environment, where reserves have increased to unprecedented levels and the Federal Reserve has begun paying interest on those reserves. We also argue that a large increase in the quantity of reserves in the banking system need not be infl ationary, since the central bank can adjust short-term interest rates independently of the level of reserves by changing the interest rate it pays on reserves.
Central Bank Lending: A Simple Example
To clarify how the types of policies implemented by the Federal Reserve over the course of the financial crisis affect individual banks’ balance sheets and the level of reserves in the banking system as a whole, we present a simple example. Consider the balance sheets of two banks, labeled A and B (Exhibit 1). Focus fi rst on the items in black. On the liabilities side of the balance sheet, each bank has started with $10 of capital and has taken in $100 in deposits. On the asset side of the balance sheet, both banks hold reserves and make loans. For simplicity, we assume that the banks are required to hold reserves equaling 10 percent of their deposits, and that each bank holds exactly $10 in reserves.
Top Five 2010 Forecasts!
The financial storm of 2008 and 2009 will go down in the record books as two out of three of the most devastating in history.
Why do I say “two out of three?” Because 2010 promises to be another record year of wild swings, market traps, misguided Wall Street and Washington advice, and based on everything I’m seeing ahead, the most dangerous year of all for investors.
How can that be when 2009 is closing out its final days with signs that the economy and markets are improving?
How could 2010 possibly be worse than 2009 or 2008?
I’ll answer these questions in a moment. First, let’s review where the world has come from before I get to my forecasts and where it’s heading in 2010.
So far in the last two years we’ve seen the failures of Merrill Lynch, Lehman Brothers, Bear Stearns, Wachovia, WaMu, Citigroup, Fannie and Freddie, AIG, GM, Ford, Chrysler, and more. Never mind that all but Lehman were bailed out by Washington, or should I say you and I, the taxpayers. They failed, period.
Our economy and financial system suffered a massive heart attack and a stroke. But as I will show you, they remain in intensive care and on life support.
We’ve also witnessed a devastating collapse in residential real estate markets, with property prices in some areas of the country down as much as 70% from their pre-crisis highs.
In 2008 and 2009 alone, there were over 7.1 million foreclosures, with another 2.4 million on the horizon for 2010. On December 31 of this year, 1 out of 4 homeowners will find themselves upside down on their homes, owing more than their property is worth.
Their biggest financial asset down the tubes.
We’ve also seen the worst stock market routs since the Great Depression.
The Dow lost 35.9% from its 2007 high to its 2008 low. Then another 26% in the first three months of 2009 before surprising almost everyone and rallying back smartly for the balance of this year — with most investors and analysts completely missing the rally, or worse, getting caught on the short side of the markets.
But even those figures hide the damage done in the markets in 2008 and 2009. All told, in real inflation-adjusted terms, the Dow Industrials lost 50% of its value in 2008 and 2009.
Even worse, from its all-time, inflation- adjusted high which occurred when the Dow was at 11,908 in November 2000 — before the Federal Reserve started printing trillions of dollar of fiat money — the Dow Industrials have lost an amazing 77.9%. And that’s after giving effect to its rally since March.
At its March low, the Dow had lost nearly 89% of its purchasing power since the year 2000 — rivaling the Great Depression.
Meanwhile …
■ Gold soared to a record high of $1,226 an ounce, up more than 400% since 2000.
by:Nirmal Bang
Why do I say “two out of three?” Because 2010 promises to be another record year of wild swings, market traps, misguided Wall Street and Washington advice, and based on everything I’m seeing ahead, the most dangerous year of all for investors.
How can that be when 2009 is closing out its final days with signs that the economy and markets are improving?
How could 2010 possibly be worse than 2009 or 2008?
I’ll answer these questions in a moment. First, let’s review where the world has come from before I get to my forecasts and where it’s heading in 2010.
So far in the last two years we’ve seen the failures of Merrill Lynch, Lehman Brothers, Bear Stearns, Wachovia, WaMu, Citigroup, Fannie and Freddie, AIG, GM, Ford, Chrysler, and more. Never mind that all but Lehman were bailed out by Washington, or should I say you and I, the taxpayers. They failed, period.
Our economy and financial system suffered a massive heart attack and a stroke. But as I will show you, they remain in intensive care and on life support.
We’ve also witnessed a devastating collapse in residential real estate markets, with property prices in some areas of the country down as much as 70% from their pre-crisis highs.
In 2008 and 2009 alone, there were over 7.1 million foreclosures, with another 2.4 million on the horizon for 2010. On December 31 of this year, 1 out of 4 homeowners will find themselves upside down on their homes, owing more than their property is worth.
Their biggest financial asset down the tubes.
We’ve also seen the worst stock market routs since the Great Depression.
The Dow lost 35.9% from its 2007 high to its 2008 low. Then another 26% in the first three months of 2009 before surprising almost everyone and rallying back smartly for the balance of this year — with most investors and analysts completely missing the rally, or worse, getting caught on the short side of the markets.
But even those figures hide the damage done in the markets in 2008 and 2009. All told, in real inflation-adjusted terms, the Dow Industrials lost 50% of its value in 2008 and 2009.
Even worse, from its all-time, inflation- adjusted high which occurred when the Dow was at 11,908 in November 2000 — before the Federal Reserve started printing trillions of dollar of fiat money — the Dow Industrials have lost an amazing 77.9%. And that’s after giving effect to its rally since March.
At its March low, the Dow had lost nearly 89% of its purchasing power since the year 2000 — rivaling the Great Depression.
Meanwhile …
■ Gold soared to a record high of $1,226 an ounce, up more than 400% since 2000.
by:Nirmal Bang
Subscribe to:
Posts (Atom)