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Robust headline earnings especially for private sector banks
We expect banks and financials to report robust earnings growth at 19% YoY and 10% QoQ
aided by strong pick up in credit growth and marginal compression. Private sector banks are
expected to report stronger earnings at 28% YoY as against 10% for PSU banks. Earnings
progression for PSU banks to remain modest due to higher operating expenses related to
retirement benefits and high loan loss provisioning, especially for SBI and UBI.
Strong traction in 3QFY11 credit growth; Deposit growth continues to
remain lacklustre
Headline systemic credit growth continues to remain robust at 24% YoY. After a slightly lackluster
performance in previous quarter, credit growth has bounced back sharply at 6.4% QoQ in
3QFY11. However, systemic deposit growth continues to remain lackluster at 14.9% YoY and
2% QoQ. Loan to deposit ratio has improved 300bps QoQ as banks continued to draw down
their surplus SLR investments to fund loan growth. SLR ratio in the system is registered at 28%.
Margins to decline marginally on a QoQ basis
NIMs for banks are likely to compress marginally in 3Q (5-10 bps) - more so for banks with
low CASA ratio and weak ALMs. While term deposit rates have gone up by 150-200bps in
the last one quarter, full intensity on margins is likely to be felt only 4Q onwards as deposits
tend to re-price with a lag while loan re-price immediately. Further, adverse impact of funding
costs should get tempered to some extent by the hike in PLRs/ base rate increases carried out
by the banks recently. Going forward, trend in CASA market share remains a key monitorable
on deposit front.
Other income growth muted due to lower trading profits
Other income growth to remain muted for Indian banks (Private at 7.1% YoY and PSU at 2.7%
YoY) due to lack of treasury profits. During the quarter, G-sec yields went up across the yield
curve, more so at the shorter end (50bps) as against longer end (10bps). Further, a large part
of bank's investment book is in the HTM category - which is de-risked. Hence, we do not
expect banks to report significant MTM losses. Operating expenses for PSU banks to remain
elevated due to higher provisions related to retirement benefits.
Asset quality to remain stable
Slippages for most Indian financials are likely to trend 2QFY11 levels with select banks being
much better placed. Private sector banks are likely to report lower loan provisioning since
overall NPL formation (more so in retail) has shown signs of stability over the past few quarters,
whereas PSU banks could be a little patchy. Our interaction with bankers suggests that cash
recoveries and upgradation has been better than previous quarters which should protect
overall level of NPLs. Slippages for SBI and UBI could remain at elevated levels.
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