Here's how Religare sees banks coping with RBI curbs

Shares of bank stocks continued their slide on Wednesday, after the Reserve Bank of India (RBI) announced a slew of measures to address exchange rate volatility post market hours on Monday.

The RBI measures included changes to Liquidity Adjustment Facility, increases in some interest rates and open market operations.
Analysts expect increased cost of borrowings for banks on the back of these moves.
Speaking to CNBC-TV18, Siddharth Teli of Religare Capital Markets says banks are likely to see a 75 basis point hit on the margins and a 2-3 percent hit on earnings, assuming rates remain at current levels for the rest of the year. However, he expects a limited impact on margins if the RBI measures prove to be temporary in nature.
On Yes Bank, which has fallen nearly 14 percent in two days, Teli expects some impact on earnings but also finds the stock attractive at current levels. Below is the edited transcript of Teli's interview to CNBC-TV18. Q: What about Yes Bank? After being down 9 percent yesterday, it has lost another 4 percent. How much more pain do you see and how much will it impact the FY14 financials?
A: In terms of Yes Bank, they are wholesale-funded and almost 40-45 percent of their deposits come up for repricing over the next six months. Some of these deposits will be relatively higher cost and some of them will be at costs lower than what the current costs are, but they will have some impact on margins.
Our calculations suggest that a 75 bps odd uptick in margins over the rest of the year could impact earnings by closer to 2-3 percent odd assuming that the current rates prevail through the year. However, if the measure of Reserve Bank of India (RBI) is more temporary in nature and if this were to be taken off in the next 2-3 months then the relative impact on margins could be limited.
Clearly the stock has corrected meaningfully over the last two days. There will be some impact on earnings, but valuations are now attractive at closer to 1.7 times and while there could be some earnings pressure over the next 2-3 quarters depending upon how long this persists, I think that downside from current levels could be limited. Q: The other wholesale funded banks and Non-Banking Financial Companies (NBFC) have you changed price targets or opinions on any of the others that you cover?
A: We have not yet changed any of our target prices or recommendations because we are not very clear will this be here to stay for a while or this measure is more temporary in nature, because clearly the impact on margins if it were to temporary then it will not be as pronounced. However, if it remains the way it is then in that case, clearly there will be a meaningful downside to our target prices and it could result in maybe some recommendation changes, but at this point in time we are not doing any of these. Q: In case these measures last for perhaps up to two months, maybe August-end or something like that then hypothetically what could be the impact?
A: If these measures were to be taken back in the next month or two, then the impact will clearly be limited, because I do not really foresee these banks replenish their liabilities with relatively longer tenure liabilities at high costs till these measures are really rolled back. So, in that case while there could be impact on earnings, it will be limited to that period which is not a very prolonged period and secondly, credit off-take has been relatively benign.
The real need to go after deposits is not very high at this point in time. So, my sense is if these were to get withdrawn by somewhere around August end then the impact on earnings will not be very high. Q: Many of these private banks are also heavily owned by few of these Foreign Institutional Investors (FII). In your conversation with people on the institutional side are you getting a sense that the clients are looking to offload their investments in any of these banking names, because we are seeing the banking sector starting to underperform?
A: I think FII ownership in private banks has been very high. Clearly, there is a lot of talk about what is going on at this point in time. People are inquiring on which are the wholesale funded names and whether they could get impacted meaningfully on account of this. I do not want to get into names of specific banks, but on balance there are investors who are looking to take some money off the table as far as these banks are concerned as well. Q: At the moment, do you have any buys at all across banks and NBFC space?
A: We just put out a note on HDFC Bank. While they get impacted on the funding side of the business, they are still relatively well placed. So, HDFC is the stock we like the most. Within NBFCs we have been fairly constructive on names like M&M Finance Services. The stock has run up, but fundamentally we remain fairly bullish over longer term. Near-term we do not see meaningful upsides here.
We quite like LIC Housing as well. So, at 1.3 times book, they will also get impacted on account of their funding cost going up, but to an extent reflected in current valuation. These are the names that we like. We have a buy on both Yes Bank and IndusInd Bank as well, but they seem to be impacted more given relatively shorter tenure of liability. So, they could get impacted a bit more, but Yes Bank has come to a level where we would not be sellers into the names at current levels. We would start buying into the name, given the valuations. We like HDFC Bank and we have hold on Axis Bank and ICICI Bank. They have also corrected after what happened yesterday. So, at some point we would start looking at them as well.