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India banking
Unhappy new year
• India banks enter 2011 with multiple negatives – sustained liquidity
shortage, high food inflation and rising oil prices. We see choppy trade
through 1Q11, but little disruption to India's long-term growth trajectory.
This should drive strong stock performance in the latter part of 2011.
• Headwinds - Oil@$90, liquidity shortage. High oil prices are stressing
the current account, fiscal deficit and inflation, forcing RBI’s hand. The
problem is exacerbated by a persistent liquidity shortage that’s inverted
the corporate yield curve. We see this as an overhang till April, when the
curve gets its positive slope back.
• 3Q preview. We expect strong 3Q11 with net profit growth of ~29%
from private banks on improving asset quality and falling credit costs.
For PSU banks margin contraction should be marginal this qtr but
slippages could continue to remain high, thus we estimate net profit
growth will be only 15% in spite of ~33% PPOP growth expected.
• Volatility is a buying opportunity. We think these stresses are
temporary and unlikely to disrupt the strong growth trajectory. Our view
thus is that (a) 1QCY10 will be choppy (not continuously declining) and
(b) the rest of the year should see a recovery in bank stocks.
• Prefer private sector banks, ICICI top pick. For 2011, we return to
our preference for private banks. The key earnings drivers - loan growth
and asset quality – do not benefit the PSU banks significantly. For the
longer term, our top picks remain unchanged: ICICI, Kotak and PNB.
• Cutting SBI EPS/TP. We are now baking in the SBI rights issue in
FY12, at a lower price – this with lower margins and higher credit costs
drives an EPS cut of 12% and a TP cut of 15% on continuing asset
quality concerns. It remains our key “avoid”.
Headwinds - Oil@90, liquidity shortage
High oil prices are stressing the current account, fiscal deficit and inflation, reducing
the RBI’s options in the money market. The problem is exacerbated by a persistent
liquidity shortage that’s inverted the corporate yield curve. We see this as an
overhang till April, when the curve is expected to get its positive slope back.
Oil on the boil
Oil prices at $90/bbl pose a significant risk to India’s economic balance. The key
impact is:
• Current account deficit - oil imports account for ~6% of GDP and sharp spikes
destabilise the currency balance. This at a time when the current account deficit is
already ruling at 3.75%.
• Inflation – some of this does seep into inflation, despite the government’s efforts
to protect the consumer. Diesel prices are up ~15% y/y as of now.
• Fiscal deficit – the inability to pass on the prices to the retail user does put
pressure on the deficit, and we think oil prices is a risk to the government's fiscal
consolidation commitments in FY12.
Liquidity shortage
• The system’s been short of liquidity since Sep-Oct, caused by a high current
account deficit and seasonal mismatches in government spending
• The corporate yield curve, consequently, is now inverted with short term rates for
banks and corporates at >9%
• Increased government spending should help, but we see no relief before April,
after the seasonal scramble for funds in March to meet priority sector lending
targets.
• “Relief" will be limited – we do not see the net shortage of liquidity falling
significantly below Rs 400bn. But even that would correct the inverted curve.
Longer term positives still in play
• We do not see more than 25-50bp upside in corporate interest rates from here.
The RBI is likely to significantly tighten rates through 2011 to control
inflationary expectations, but that’s unlikely to impact borrowing rates as the CPrepo spread should concurrently compress. In fact, borrowing costs may see a
small decline in 2QCY11.
• The risks to the investment cycle are being overplayed, in our view. We think the
recent episodes of the environmental ministry canceling large projects are the
exception and not the rule, and state governments are becoming increasingly
competitive in attracting investments. Government policy will probably turn
incrementally investment –friendly in 2H, once the major state elections are over.
• The rural economy is gathering strength. The normalized monsoons of 2010 (vs
weak in 2009) is the cyclical driver in the near term, with NREGA and higher
support prices the structural driver. Lack of investment remains a worry, but we
think the current labour “crisis” could spur private sector investment and
mechanizations.
State Bank of India: We cut estimates and PT
We are now baking in the SBI rights issue in FY12, at a lower price – this drives an
EPS cut of 12% and a TP cut of 15% on continuing asset quality concerns. It remains
our key “avoid”. We were earlier factoring in rights issues of Rs150bn at
Rs3100/share in FY11 and now factor in the rights issue at Rs2600/share in FY12.
Our FY11 EPS is positively impacted due to shift of rights issue to FY12, but due to
the cut in margins, higher credit costs and rights issue at lower price (implying higher
dilution) our FY12-13 EPS estimates are revised down by ~12%.
Our revised Sep-11 PT is Rs2800/share (Rs3300/share earlier) based on 10.5x (11.0x
earlier). Upside risks to our estimates and price target are positive newsflow about a
possible FPO, and downside risks include higher-than-expected slippage from the
restructured book.
3Q11 Preview
3Q11: Strong for private banks, mixed for PSU banks: We expect strong 3Q11
with net profit growth of ~29% from private banks driven by improving asset quality
and falling credit costs. For PSU banks margin contraction should be marginal this
qtr but slippages for large PSU banks could continue to remain high, thus we
estimate net profit growth will be only 15% in spite of ~33% PPOP growth expected.
Margin contraction in 1HCY11: In spite of the steep hikes in deposit rates over
last 1-2 mnts margins for most banks would be impacted only from 4Q11 as assets
would reprice faster than deposits. But we expect meaningful margin impact over
1HCY11 as deposits gets repriced upwards. System liquidity and pick up in credit
growth could pressure deposit rates in the near term.
Asset quality: No respite for PSU banks: Asset quality continues to improve for
private banks with retail asset quality remaining sanguine. Axis Bank has also hinted
towards improving asset quality trends. For PSU banks we expect credit costs will
continue to remain elevated as slippages could remain high, including from the
restructured book. BOI’s asset quality could improve driven by large airline upgrade.
Key results to watch out for: (1) ICICI bank: Expect momentum for balance sheet
growth to accelerate and credit costs to remain low (2) SBI Bank: Margins should
hold up in this qtr but asset quality would continue to remain a worry with slippages
expected from the restructured book (3) Axis Bank: Asset quality should see some
improvement and hence we expect lower credit costs.
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