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Sector Name: India Financials
Potential Result Outperformer: BOI
Potential Result Underperformer: Union Bank
Result Expectations – Key Highlights
Banking stocks have corrected by 10-25% from their recent peaks for various
recent issues like the ‘bribery for loans’ investigation, 2G Telecom and MFI loans
concerns, liquidity concerns and pension liabilities for PSU banks. But, we believe
this is overdone and is not likely to be reflected in the oncoming 3Q earnings
season.
Earnings for banks in 3Q are likely to be a mixed bag, in our view, with strong
operating level earnings growth led by top-line (NII) growth momentum
continuing. While we think margins are likely to show a 5-15bps correction qoq,
we believe rebound in sector loan growth (+22-23% yoy) will help top-line growth
for most banks. But, reported earnings (net profit) growth for govt. banks could
remain under pressure (sub 15% yoy growth in general) owing to likely pension
liabilities crystallizing and also some incremental slippages from restructured
loans to NPLs leading to higher but a measured rise in credit costs. Also, lower
profit growth could be reflected owing to banks having to make incremental
provisions on a/c of teaser loans (one-time).
Loan growth pick-up to aid top line, but weak deposit growth a worry
While loan growth has picked up to 23% yoy recently (from <20% yoy levels in
2Q), deposit growth has lagged at 15% yoy levels, invariably leading to a fresh
round of deposit rate hikes and banks raising funds from wholesale sources (CDs
and corporates). While this situation will likely put pressure on banks’ loan growth
and margins in 4QFY11, 3Q earnings, which matter now, will likely be strong at
the top-line level, barring some normalization of margins qoq (5-15bps) on recent
deposit rate hikes will have a bearing only for few weeks in this quarter.
The strong top-line growth is expected to be a function of high incremental LDRs
+100% are much higher than last year’s (same time) incremental LDRs at <40%
same period last year. The higher incremental LDRs coupled with yoy margin
expansion (partly due to base effect of last year) should see banks’ top line grow
by +20% yoy. Barring ICICI Bank, which we estimate is likely to show a sub-15%
top-line growth, we expect most banks to report top line growth in excess of ~20-
40% yoy.
Credit costs rise to be measured; not worried on bond books
Banks have already witnessed the majority of pain across the industry by way of
slippages. We believe that the worst is behind on account of macro recovery and
the focus will shift to recoveries/upgradations. Hence, expect credit costs rise to
be measured in 3Q. Especially, we expect private banks to continue to see a
decline in credit costs faster than govt. banks. Bond yield worries appear to have
ceased as yields have moderated to 7.9% levels and, with most banks having
+75-80% in HTM and cushion until 7.9-8.0%, comfort is higher.
Pension liabilities a big worry for most govt. banks; a ‘Wild-Card’
Govt. banks like UBI and PNB have already begun taking pension related
charges, but most other govt. banks (barring SBI) have yet to crystallize the
pension costs. We believe this will remain a wild card in 3Q earnings as most
pension schemes had a closure date of Oct 31st and hence banks were expected
to crystallize their pension liabilities in this quarter. While we have assumed on
best case estimates basis pension charges for banks, higher than expected, as
seen in the case of UBI in the last quarter could potentially derail earnings growth.
Earnings growth – mixed bag
Banks’ earnings are likely to be a mixed bag, with most govt. banks showing
modest reported earnings growth owing to possible pension liabilities charge and
credit costs. Amongst the govt. banks, PNB, BOI and OBC likely to report strong
earnings growth (+20-65% yoy) but banks like BOB, Canara, UBI and Indian are
likely to post modest growth, in our view. Private banks’ earnings growth is
expected to be strong led by unwinding of credit costs and top,line.
Govt. Banks - operating strong but may disappoint on reported earnings
Operating earnings (large caps) are expected to be the best for SBI (+40% yoy)
followed by BOB (+30% yoy) and PNB (+27% yoy). On reported earnings, we
expect BOI to show +65% earnings growth yoy driven by strong topline and
falling credit costs followed by OBC (+35% yoy earnings growth), partly on higher
recoveries. PNB, in contrast, may show +20% earnings growth driven by strong
topline. SBI on the other hand may show a modest (+5-6% yoy) earnings growth
owing to higher provisioning. BOB, on other hand may show a modest 10-12%
yoy growth in reported earnings owing to base effect of last year, wherein tax
rates were abnormally lower (19%). UBI may show a +2-3% yoy contraction on
sustained higher slippages (NPLs) leading to sharply higher yoy credit costs. We
think Indian Bk is likely to report earnings growth of +7-8% but may surprise on
lower than estimated credit costs. Core earnings (ex TP) for Indian Bk are
expected to show a growth of +30% yoy.
Private banks: Continue to roll
ICICI Bk may show +30% yoy earnings growth led by unwinding of credit costs;
topline growth is forecast at sub 15% levels for ICICI Bk. Amongst other private
banks, we expect HDFC Bk to lead the pack with profit growth of +32%. Axis
Bank is expected to show profit growth of 30% yoy but core earnings growth of
+27% yoy only. Contrary to the worries, we believe smaller private banks like
Yes Bank may still show earnings growth of +40% yoy driven by strong topline
growth yoy and fees. Federal Bank may also show earnings growth of +50% yoy
driven by base effect of last year wherein tax rates were unusually high at +50%
levels owing to a court case.
NBFCs: Benefit from volume growth and conducive funding environment
Within the NBFC space, we expect volume growth of +20-30% to continue for
most players and benefit from low funding cost up until early Dec’10 to help
margins. Hence, for the most part, we expect 20-40% yoy growth in topline. Base
effect will continue to work in Indiabulls’ favor (~+130-140% yoy profit growth).
Amongst Infra. Finance plays we expect REC to outperform PFC in profit growth
(+35% yoy vs. 29% yoy) due to better margins. But, we expect weaker
disbursement and volume growth for REC. IDFC is expected to report profit
growth of +30% as higher disbursement growth should lead to better topline. We
estimate Shriram Transport is likely to report +30% yoy profit growth driven by
+23-24% yoy growth in volumes and margins sustaining at 2Q levels.
HDFC Ltd. is likely to report +22% volume growth with spreads of ~2.3%. But
profit growth is estimated at +30% yoy owing to gains from sale of stake in one
investment in IL&FS (+Rs1.6bn). HDFC will not have to make higher incremental
provisions on teaser loans as it is already carrying excess provisions (~Rs4bn) on
its b/s which will suffice the incremental requirements. But LIC HFC profit growth
at +4% yoy will be owing to higher incremental provisions on teaser loans
(Rs120bn loan book; provisions increased to 200bps from 40bps earlier). We also
reckon top-line growth to come down to +30% levels vs. +60% in the last few
quarters on base effect and margin (spread) pressure owing.
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