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Indian Financials
3QFY11 Preview
Expect margins to remain stable backed by healthy loan
growth and lending rates rising in tandem with deposit rates
Incremental asset quality concerns to reduce for PSUs, but
other uncertainties may dampen earnings growth
We prefer small private banks: Yes and IndusInd Bank
3Q earnings outlook
Private banks are likely to deliver better results with stable margins and lower
provisioning concerns. On q/q basis, we expect private banks to deliver 9% profit growth
vs 4% for PSUs, while on a y/y basis, we see private banks leading with a 26% bottomline
growth vs.16% for PSU banks.
Margins dependent on liquidity, pricing power
After 7 lacklustre quarters, the sector finally saw a comeback of credit growth in 3Q
despite a very tough liquidity environment, challenges in mobilising deposits and rapidly
rising rates. While credit has growth has been encouraging, deposits growth has lagged
forcing banks to raise deposit as well as lending rates frequently. Recent data suggests that
most of the deposit hikes have been passed on by banks suggesting that banks may
preserve margin stability in 3Q. However, PSU banks with longer duration deposits and
shorter duration loans are likely to see an immediate margin benefit upfront followed by a
decline led by deposit repricing catching up.
Provision to continue to haunt PSUs
Provisions will be another important factor in upcoming 3Q earnings season – moreso for
the PSU banks. While PSUs have recognised most of the one-off provisions in the
previous quarter, slippages from restructured book may continue, though at a slower pace.
Also, PSUs are likely to decide on the incremental pension liability which would impact
economic value even though the hit to earnings maybe ameliorated by amortising it over
the next few years. Most PSUs have been providing for this on an ad hoc basis and may
have smaller incremental liabilities.
Stay with the private banks
Given the higher earnings’ visibility and fewer concerns for private banks coupled with
valuations at their 5-year average levels vs. near all-time highs for PSU banks, we
continue to prefer private banks over PSU banks in the near term. Prefer small private
banks – YES (YESB.BO, Overweight, price INR291, target INR534) and IndusInd Bank
(INBK.BO, Overweight, price INR249, target INR400)
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