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India Banks
3Q11 Preview: Increasing Risks to Margin-alise Healthy Earnings
Healthy 23% profit growth expected — We estimate Indian banks’ earnings to
grow at 23% yoy in 3Q11 driven by: a) Recent acceleration in loan growth to 23%
yoy; b) NIMs remaining high (though moderating qoq); and c) Sustained fee
income growth. While the external environment has thrown up signs of increasing
risks to NIMs and asset quality – these will likely show up only fleetingly in 3Q.
Key Trends to Watch — a) NIMs: Increasing pressure, should start showing up
with a 6bps qoq estimated decline, stronger deposit franchises should hold up
better relative to the sector; b) Bond portfolio yields: flattened out towards end of
the quarter, do not expect significant gains/losses in 3Q; c) Asset quality / Loan
loss charges: PSU Banks more vulnerable as higher provisioning costs likely to
recur, private banks relatively better. Overall, this was a tight quarter, with fine
balancing required on key parameters including – loan growth, margins, liquidity,
bond yields and asset quality – increases possibility of surprises.
Key Stocks to Focus — We believe private sector banks will outperform PSU
banks with a profit growth of 30.5% vs 18.3% with the key distinction likely to be
higher loan loss charges for PSU banks. Key stocks likely to be in focus: a) SBI –
some pressure on NIMs, asset quality, consensus likely more bearish than us; b)
ICICI Bank – we expect growth to resume, all eyes on impact of microfinance
exposures; c) Axis – some talk of growth slowdown, could impact negatively if
growth lower than expected; and d) Yes Bank – NIM pressures should show up.
Sector View: Will look to add on weakness — The sector has underperformed
recently (-7% vs Sensex in last 3 mths) mostly on macro – interest rates, inflation
and liquidity which are near-term stock concerns and could outweigh better than
expected operating performance. We believe that medium-term outlook for the
sector remains more positive (in-line with the economy). We prefer private sector
banks and will look to add stocks with strong deposit franchises on corrections.
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