PERFORMANCE IN BANKING SECTOR

the performance of the banking sector is likely to remain under pressure and this euphoria is thus likely to be short-lived. No wonder, many analysts echo the same view, "there is some more pain left, before things improve for banks." They are not excited about the short-term (4-6 months) prospects of the banking sector with some suggesting that the RBI is likely to tighten the noose further, by raising repo rates and CRR. This anticipated move is expected to further increase the cost of funds for banks. Should that happen, banks could see further pressure on margins, perhaps higher customer defaults, higher losses on trading (bond) portfolio and a slowdown in business itself. The silver lining is that the prospects for the sector look good in the long run.

Margins: Under pressure The RBI has raised the repo rate (125 bps in last 12 months) and CRR, both of which are currently around 9 per cent levels. These moves have increased the cost of funds for banks. Since interest rates on deposits have also moved up to 10 per cent (one-year deposits), the highest in nearly over five years, there are high chances of customers moving their surplus current and savings (CASA) deposits to fixed (term) deposits, thereby further increasing the cost of funds for banks. Analysts say that in a rising interest rate scenario, banks with a high CASA ratio are better placed vis-à-vis those with a lower CASA metric. That's because, CASA deposits attract low interest rates (interest on current account balance is nil, while on savings account it is 3.5 per cent per annum). They estimate that an increase of 100 basis points in CASA can improve NIMs by 10 basis points; as cost of CASA deposits remains constant even as lending rate charged to customers rises.

On the other hand, while the banks have resorted to hiking their respective prime lending rates (PLR), analysts expect the pressure (though not significant) on the NIMs to continue in Q2 FY09. Thereafter, NIMs could stablise and perhaps improve from Q1FY10. Some of this pressure could also be offset considering that some banks have increased their deposit rates by alower margin, and thus provide a surprise (beat estimates).

Asset quality & treasury income: Under stress? The other area of apprehension is the threat of rising NPAs, which though will vary depending on the portfolio quality of individual banks. Says an economist, "In any downturn, the asset quality tends to deteriorate. But, unlike in the past, the recovery systems for banks (including debt recovery tribunal, implementation of SARFESI Act, etc) are much stronger." Adds Tridib Pathak, CIO, Lotus AMC, "In a slowdown, NPAs can increase, which is a cyclical risk. But, are there signs of any secular deterioration? Certainly not!" Economists explain that defaults are largely seen in non-collateral areas (mainly retail) like credit cards, personal loans, etc. Out of the retail assets, which form about 25 per cent (average) of total advances, about 18 per cent comprises housing loans, which are backed by assets. And, the remaining seven per cent comprises of auto loans (backed by vehicle as a security), credit cards, personal loans, etc. Thus, in a worse case scenario, the defaults will be within manageable limits. On the other hand, with interest rates on the rise and a good chance of RBI hiking rates further, banks may have to provide for the fall in bond values (held in available for sale (AFS) category), thus impacting profits over the next one-two quarters. But, the same would get reversed (since it is abook entry) thereafter, as interest rates decline.

Growth rates: Seen slowing down Higher interest rates mean lower affordability and hence, are expected to lead to slower growth in retail and corporate advance, which is already happening. Banks, too, have deliberately put some brakes on providing credit to the retail segment to keep a tab on credit quality.

With access to foreign funds (ECB, etc) not coming easily, and equity markets in the doldrums, demand from corporate India has however been healthy. Says Tridib, "Due to various reasons (including the fall in stock markets), the corporate finance activities have improved. This is on account of critical projects, including infrastructure and capex, where demand for credit is unlike to wane." Thus, overall credit growth is expected to slow down from over 25 per cent currently to around 18-20 per cent. Regards the fee-income, this too is likely to slow down over the next few quarters but still remain healthy between 15-25 per cent. Nonetheless, the overall income and profit growth for the industry should be at a respectable 15-25 per cent.

The silver lining Even as the outlook for the next six months remains subdued led by rising costs, asset quality concerns and higher provisions, the sector's medium-to long-term prospects continue to look good. Explains Tridib, "If you look at the last 15 years, the NIMs of banks have averaged around 3 per cent, which is across interest rate cycles.

This is because banks are a classic 'passthrough' mechanism. If you look at the recent hikes, banks have passed on the cost increase through PLR hikes. So, any pressure on margins will be temporary and over a period margins will remain stable and possibly inch up." Adds Karwa, "Margins should not correct from current levels, and are likely to be maintained as banks are also increasing lending rates." So, while it may take time for the clouds to clear off completely, the sector (stocks) is expected to see range bound trading. For instance, if the RBI hikes repo rates or CRR further then expect banking stocks to be hit in the interim. Likewise, in the current situation, any further upside is unlikely. Meanwhile, watch out for any surprises that could come up in the form of significant losses on account of forex exposure (arising from exposure to credit derivatives, as yields have hardened in international markets) and, on account of asset quality and NIMs over the next two quarters. Any spike in prices of crude oil or commodities to recent peaks (low probability as per experts) could prove to be dampeners, and cast their ominous shadow on the prospects of the banking sector.

Thus, any downward swing in market sentiments could be used as an opportunity to selectively buy banking stocks. Experts prefer banks with high CASA ratio, strong management and good liability (loan) profile. Among preferred picks include Axis Bank, HDFC Bank, Union Bank of India, Indian Bank, Federal Bank, South Indian Bank, PNB, SBI and ICICI Bank.

REALTY Grappling with low demand "Some of the real estate players are land bank rich, but cash poor," said a CEO of a large Bangalore-based realty firm referring to the liquidity problems being faced by real estate players. While the real estate players The Smart Investor spoke to believe that the liquidity crunch and rising costs are a short-term phenomenon, analysts are of the view that the pain is going to last for at least two quarters if not more going ahead.

The rise in interest rates, the spike in input costs and drying up of funding options has led to adip in prices, drop in profit margins and slowdown in development of construction projects. The high three digit year-on-year growth in sales, EBIDTA and net profit registered in every quarter over the last few quarters is passé and this is reflected in the June quarter results of the companies that constitute the BSE Realty index. Though some of it is due to a high base, the slowdown in demand has had its impact with sales and profit margins registering lower double digit growth. Unless the situation related to the high cost of capital, input costs and most importantly demand changes for the better, the sector could see worse days over the next three months.

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CA. VIKAS KAPAHI
TREASURER
JAB WE MET CA
REDEFINING PROFESSIONALISM

BASICS OF MUTUAL FUND

Mutual Fund Basics

Investing is the process of growing your capital by putting it into securities, such as stocks, bonds, insurance etc. However most of us do not understand the intricacies of these. Also, lots of investments have huge minimum amounts as entry barriers. Mutual Funds allow a normal investor to benefit from the firm grasp of key concepts that experts have and grow his money in a steady, relatively safe manner.

What are Mutual Funds? Advantages of investing in Mutual Funds Types of Mutual Funds

What are Mutual Funds?

A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification. You could make money from a mutual fund in three ways: Income is earned from dividends declared by mutual fund schemes from time to time. If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain. If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your mutual fund units for a profit. This is tantamount to a valuation gain.

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Advantages of investing in Mutual Funds

Professional Management The primary advantage of funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.   Diversification By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.   Economies of Scale Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.   Liquidity Open-ended mutual funds are priced daily and are always willing to buy back units from investors. This mean that investors can sell their holdings in mutual fund investments anytime without worrying about finding a buyer at the right price. In the case of other investment avenues such as stocks and bonds, buyers are not necessarily available and therefore these investment avenues are less liquid compared to open-ended schemes of mutual funds.   Regulations All Mutual Funds are registered with SEBI and they function under strict guidelines designed to protect the interests of the Investor.   Tax benefits Equity Funds Currently, dividends are tax-free in the hands of the investor. There is no distribution tax payable by the Mutual Fund on dividends distributed. There is no tax deduction at source on dividends as well. Investments for over 12 months qualify for long term capital gains. Moreover for resident investors there is no TDS on redemption of the units. The recently introduced Securities Transaction Tax is applicable to equity fund investments. Debt Funds Currently, dividends are tax-free in the hands of the investor. However, there is distribution tax together with surcharge and education cess, as may be applicable, payable by the Mutual Fund on dividends distributed. There is no tax deduction at source on dividends as well. Investments for over 12 months qualify for long term capital gains. For resident investors there is no TDS on redemption of the units. top

Types of Mutual Funds

Schemes according to Maturity Period:A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.   Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices that are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

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CA. VIKAS     KAPAHI
     TREASURER
   JAB WE MET CA
REDEFINING PROFESSIONALISM

ITC tech arm to announce US buy Tuesday

BANGALORE: The information technology arm of ITC Ltd, top cigarette firm, will announce the acquisition of a US based technology firm around noon (0630 GMT) on Tuesday, a public relations firm said in a statement issued on behalf of ITC Infotech.

Further details of the announcement were not immediately available. Last month, ITC Chairman YC Deveshwar said that the company was in talks to acquire a US-based information technology firm and the acquisition would be made through ITC Infotech.

ITC, 31.7-per cent owned by British American Tobacco Plc, has interests in technology outsourcing, retail and packaging, and is expanding a range of foods and personal care products to cut its dependence on cigarettes.

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CA. VIKAS     KAPAHI
     TREASURER
   JAB WE MET CA
REDEFINING PROFESSIONALISM

INVESTOR'S PARADISE

Tuan Huynh, Director & CIO, Deutsche
Bank,PAM


Globally, there are clear signs of risk averseness and analysts worldwide are divided on whether the worst is over and what would be the economic outlook going forward. However, Tuan Huynh, director, chief investment officer — India and China, Deutsche Bank, PAM (private asset amangment) is of the view that investors investing in countries like India have not much to worry. Mr Huynh is of the view that returns would continue to be handsome, but the investment horizon may become a little longer. Based at Singapore, Mr Tuan was in India recently to take stock of the situation.

Wealth creation has taken a pause after years of secular growth. What is the strategy going forward?

The year witnessed a tough investment environment. Some asset classes gave negative returns. Markets were going up 40% every year and suddenly the meltdown occurred.

Clients are now raising questions as they are concerned about developments. We do believe that there are no clear answers but there is need to take a systematic approach to investing.

What are you advising your clients?

Our investment focus is India specific but for the purpose of diversification, we invest across different asset classes like equity mutual funds, real estate, structured products and commodity. To further diversify our client's portfolio from country specific risk, we are advising them to invest in overseas assets.

For instancee, investing in Latin America to benefit from high commodity prices. Further, there is a need for change in allocation on a continuous basis.

Given the prevalent scenario, what is the risk appetite among your clients?

The portfolios are managed on the basis of risk profile of different investors like having a conservative approach, moderate or balanced approach. At this point of time, we are largely neutral on equities and bullish on assets class like soft commodities and precious metals.

As an investment theme, we continue to believe that soft commodities like corn, soya would still giving good returns due to demand – supply factors. Apart from that, we believe that precious metals like gold would also generate good returns for investors in times to come.

Why do you think markets have not yet bottomed out?

Some of the reasons for our concern are the fate of global financial players. The brief rebound of global markets from mid-march happened due to the Bear Stearns bailout which somewhat took away the systemic risk.

But in June, concerns on financials continued with downgrading by S&P of Merrill Lynch, Morgan Stanley and Lehman Brothers.

What is your macroeconomic outlook on India?

Despite the strong reading for the first quarter, we still feel that the economy will slow due to a combination of rising inputs costs, tight monetary conditions and capacity constraints.

The manufacturing sector has been slowing for several quarters now. We think that RBI's shift to tightening money supply is not just a reaction to higher energy prices but necessary to bring domestic demand in line with a constrained supply-side.

Would this affect your investment decisions in India?

The kind of growth that India has witnessed is one of the best. Going forward there are some risks to economic growth, which would certainly slow the pace of growth.

We have downgraded our GDP target on India. But even then, it will continue to post better growth as compared to other countries. Typically, at this point of time, we are looking at higher returns on a longer investment horizon
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CA. VIKAS KAPAHI
TREASURER
JAB WE MET CA
REDEFINING PROFESSIONALISM

SOUTH INDIAN BANK DECLARES 30 PERCENT DIVIDEND

THIRUVANANTHAPURAM : The Annual General Meeting of Thrissur-based South Indian Bank (SIB) has declared the highest ever dividend of 30 per cent while approving the Board's proposal to come out with a bonus issue and employees stock option scheme.

This was the higest ever rate of dividend declared by the bank in its 79 years of service, an SIB release said here on Monday. The capital bse of the bank had been strengthened by various measures like the rights issue, public issue, follow-on public issue and qualified institutional placement.

The bonus share would be issued to existing shareholders in the ratio of 1:4 on the record date. The employees' stock option scheme would be implemented to reward existing employees who had put in long years of service and also to offer incentive to new staff members.

In the current financial year, the bank would strive to increase the net profit to Rs 190 crore from Rs 150 crore the previous year, SIB's CMD Dr V A Joseph informed the AGM. A total business target of Rs 30500 crore had been set for the current year.

Also, the bank was working to add five lakh new customers in Savings Bank accounts which would mark a three per cent incrase in Current Account and Savings Bank Accounts (CASA) of the bank.

As NRIs form a sizeable clientele group, the bank planned to conduct a one-month long "Pravasi Utsav" to promote its bouquet of proudcts and services to NRIs.

The AGM also re-elected Dr John Joseph, Dr C J Jose and Jose Alapatt to the Director Board.

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CA. VIKAS     KAPAHI
     TREASURER
   JAB WE MET CA
REDEFINING PROFESSIONALISM