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BANKING
Strong quarter along with mounting risks
q We expect strong core performance during Q3FY11 for banks under our
coverage aided by low base of last year. Net Interest Income (NII) is expected
to register a robust growth of 26.6% YoY during Q3FY11 on
back of strong credit growth and YoY improvement in NIMs. However,
net income growth for banks under our coverage is likely to be slightly
moderate at 16.7% YoY on back of lower treasury gains and higher provisions.
q Credit growth has picked up to 23.8% (YoY) as on December 17, 2010
vs. 11.2% witnessed a year ago. However, deposit mobilization is still
lagging the loan growth and has been muted at 14.8% (YoY) as on December
17, 2010.
q We expect NIM to decline marginally during Q3FY11 vis-à-vis Q2FY11, as
rise in cost of funds due to increase in deposit rates along with some
hardening in the bulk deposit rates would be partially compensated by
the increase is their PLR/Base rates. However, banks are likely to witness
improvement in their NIMs on YoY basis due to low base in Q3FY10.
q Slippages are expected to remain at elevated levels during Q3FY11 (especially
for PSU banks) in line with last quarter. However, higher upgrades/
recoveries by these PSU banks could provide positive surprises.
For private sector banks, we believe NPA cycle has peaked. Going forward,
we expect asset quality concerns abating on back of improvement
in economic environment.
q 10-Yr G-Sec yield rose by only ~10 bps during the quarter; hence, we do
not expect any significant MTM loss on the Investment portfolio for
banks under our coverage.
q The banking sector has underperformed during last quarter mainly led
by worries over margin pressure and asset class deterioration with the
revelation of 'bribe-for-loan-scam' by CBI. There are also rising concerns
over microfinance & telecom exposure of Indian banking system. We believe
medium term outlook for the sector is attractive and we advise clients
to look for stocks with robust liability franchise (strong CASA mix).
q Top Picks: ICICI bank, Axis Bank, SBI, PNB, BoB, Allahabad Bank, J&K
Bank
Core income expected to register a robust growth; however net
income growth is likely to be slightly moderate
We expect strong core performance during Q3FY11 for banks under our coverage
aided by low base last year. Net Interest Income (NII) is expected to register a robust
growth of 26.6% YoY during Q3FY11 on back of strong credit growth and YoY
improvement in NIMs. However, net income growth for banks under our coverage
is likely to be slightly moderate at 16.7% YoY on back of lower treasury gains and
higher provisions.
In terms of Net Interest Income (NII), public sector banks under our coverage are
likely to report 30.9% growth higher than the 16.5% growth expected for the private
sector banks. However, in terms of net profit, we expect private sector banks
under our coverage universe to deliver a robust earning growth of 27.5% as
against a moderate growth expected for PSU banks (11.8% YoY) due to lower
treasury gains and higher provisions.
We expect moderate net profit growth (11.8% YoY) for SBI despite strong NII
growth of 30.5% on back of higher operating expenses due to gratuity related
provisions and higher credit cost assumption (Provisions at 2.33x during Q3FY11).
For ICICI bank, we are forecasting strong bottom line growth (26.3% YoY) despite
flat operating profit (2.6% YoY) mainly due to lower credit cost.
We expect IOB (78.8%; on low base) and BoB (20.5% growth) to deliver relatively
better numbers in our PSU banking space. Similarly in private banking universe, we
expect Axis bank, HDFC bank and ICICI bank to deliver better bottom line growth.
Strong credit growth; deposit growth continues to lag
Credit growth has picked up to 23.8% (YoY) as on December 17, 2010 vs. 11.2%
witnessed a year ago. However, deposit mobilization is still lagging the loan growth
and has been muted at 14.8% (YoY) as on December 17, 2010.
Banking system witnessed strong deposit growth during FY10 leading to surplus liquidity
and hence started going slow on the deposit mobilization. However, this
excess liquidity has come down which is visible from the higher C/D ratio (75.8% as
on December 17, 2010).
As on December 17, 2010, loan book has grown ~12% YTD whereas deposits
have grown by only ~7%. We believe deposit mobilization is key to the future loan
growth. Banks have also started raising their deposit rates and have hiked their
term deposit rates by 50-150bp across maturities to garner more retail FDs. We
opine that deposit growth would pick-up in Q4FY11.
Incremental loan growth (QTD; as on December 17, 2010) stood at Rs.2.18 tn as
against Rs.681 bn in the corresponding period last year. We believe that strong
economic environment and improved business confidence are likely to aid the
strong momentum in loan growth, going forward. During last 17-18 months, loan
growth was largely driven by infrastructure segment and partly by working capital
requirements. However, early signs of broad-based pick-up in loan demand are visible
which is positive for the sector, in our view.
We expect loans to grow at 18-20% during FY11 on back of improvement in business
confidence which is likely to translate into higher capex demand. Currently
banks have funded this growth by liquidating their SLR and MF investments. However,
going forward, deposit growth is likely to calibrate the loan growth.
NIMs have likely declined marginally
We expect NIM to decline marginally during Q3FY11 vis-à-vis Q2FY11, as rise in
cost of funds due to increase in deposit rates along with some hardening in the
bulk deposit rates would be partially compensated by the increase is their PLR/Base
rates.
However, banks are likely to witness improvement in their NIMs on YoY basis due
to low base in Q3FY10. Many banks (especially PSU banks) had witnessed lower
NIM during Q2FY10 due to excess balance sheet liquidity, lower pricing power
along with high interest outgo on the back of high cost deposits mobilized during
H2FY09. This improvement in the margin would help achieve higher NII growth
(26.6% YoY) for banks under our coverage.
We are factoring in higher margin compression for banks under our coverage with
a relatively week liability franchise and greater reliance on bulk funding.
Treasury gains likely to be muted
10-Yr G-Sec yield rose by only ~10 bps during the quarter; hence, we do not expect
any significant MTM loss on the Investment portfolio for banks under our coverage.
We also expect moderate growth in non-interest income for banks under
our coverage due to muted treasury profit along with lower 3rd party distribution
income.
Slippages in line with Q2FY11; operating expenses likely to increase
Slippages are expected to remain at elevated levels during Q3FY11 (especially for
PSU banks) in line with last quarter. However, higher upgrades/recoveries by these
PSU banks could provide positive surprises. For private sector banks, we believe
NPA cycle has peaked.
Going forward, we expect asset quality concerns abating on back of improvement
in economic environment. We are building in higher provision requirements as well
as higher operating expenses (increase in liability on account of deficit for 2nd pension
option and hike in gratuity payments). We believe any major pressure on asset
quality and higher than expected pension liability could be the negative surprises, in
our view.
The banking sector has underperformed during last quarter mainly led by worries
over margin pressure and asset class deterioration with the revelation of 'bribe-forloan-
scam' by CBI and rising concern over microfinance & telecom exposure by Indian
banking system. We believe medium term outlook for the sector is attractive
and we advise clients to look for stocks with robust liability franchise (strong CASA
mix).
Top Picks
ICICI bank, Axis Bank, SBI, PNB, BoB, Allahabad Bank, J&K Bank
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