CLSA: Indian financials 3QFY11 preview

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Modest profit growth
Net profit growth for banks in 3QFY11 would moderate to 13% YoY due
to lower treasury gains and higher NPL provisions. Sequentially margins
will contract but key trends to watch would be a) Pension provisions that
could be materially higher than initial estimates and b) trend in asset
quality. We believe NPL slippages would remain high for PSUs, especially
for SBI where slippages could be higher than 2Q. ICICI and BoI are likely
to surprise positively; SBI and PNB may disappoint.

Treasury gains, credit costs will be drags on net profit growth
􀂉 Operating profit growth for banks on a YoY basis will be healthy at 29% supported
by strong loan growth (24% YoY) and YoY improvement in NIMs
􀂉 Net profit growth would, however, be muted (13% YoY) due to low treasury gains
and higher NPL provisions
􀂉 On a sequential basis, NIMs would contract marginally due to sharp rise in deposit
costs, both retail and wholesale, in 3Q (real impact of this will reflect only in 4Q)
􀂉 Some banks (especially PSUs) may report MTM losses on AFS portion of G-Secs
due to 20-50bps rise in medium term bond yields, but 10 year yields were stable
Pension liability provisions and asset quality can disappoint
􀂉 PSU banks will declare final estimates for pension liabilities and our industry
interaction suggests that these may be materially higher than previous estimates
(may be up to 15-20% of net worth)
􀂉 Asset quality is likely to remain under pressure for PSU banks and some banks
(including SBI) may report slippages in 3Q being higher than of 2Q levels
􀂉 Private banks are still benefiting from retail credit cycle and hence would report
drop in credit costs, driving 27% YoY growth in their net profits (8% for PSUs)

Upsides in ICICI and BoI; SBI’s asset quality will be key
􀂉 ICICI and BoI could surprise on the upside; ICICI will report sequential loan
growth and lower credit costs (slippages may remain negligible) and BoI would
report the higher net profit growth on a low base
􀂉 While SBI’s core earnings growth will be strong, net profit would remain flat (for
10th quarter in a row) due to higher NPL provisioning
􀂉 We expect NBFCs to report healthy earnings growth led by loan growth, but trend
in margins/ spreads will be crucial
􀂉 HDFC will report +30% YoY growth in net profits due to an extraordinary income
on sale of stake in IL&FS