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Banking
Strong quarter amid rising risks
We expect strong NII growth for banks under our coverage supported by a low
base of Q3FY10, strong credit growth and year-on-year NIMs improvement.
However, PAT growth would be relatively lower due to increased operating
expenses and provisions. NIMs are expected to decline from Q2FY11 levels
though the downside would likely be capped by asset re-pricing. Slippages could
remain high (particularly for PSU banks) and hence, we are factoring in higher
provisioning expenses. We are also building in higher operating costs stemming
from provisions towards second pension liabilities. We remain positive on the
sector in the long term and continue to prefer banks with a superior liability
franchise. Our top picks are State Bank of India (SBIN), Bank of Baroda (BOB)
and Axis Bank (AXSB) among large caps and Dena Bank (DBNK) among mid caps.
Key risks to our call are a sharp rise in inflation and negative surprises on asset
quality and pension liabilities.
Advances growth strong; deposit growth continues to lag: Total advances of
scheduled commercial banks (SCB) are likely to grow by over 6% QoQ and 23–
24% YoY. However, deposits continue to lag credit growth and are likely to
increase only 3–4% QoQ.
NIMs to decline marginally: The sharp rise in deposit rates would put pressure
on margins; however, we believe that NIMs moderation would be marginal in
Q3FY11 as banks have hiked lending rates and assets are re-priced faster than
liabilities. Thus, on a YoY basis, NIMs would still show significant improvement
due to the low base in Q3FY10; consequently, we expect NII for our coverage
universe to grow by 28% YoY (3% QoQ). We are factoring in higher margin
compression for banks with a relatively poor liability franchise and greater
reliance on wholesale funding. However, net revenue growth could be lower at
22% YoY due to sluggish fee income growth and muted treasury gains.
Slippages to remain in line with Q2FY11; opex likely to increase: Slippages
could remain at elevated levels for some banks (particularly PSUs), as was
witnessed in H1. Higher bond yields may lead to MTM losses as well; however,
the quantum is unlikely to be significant as bond yield on 10-yr G-Sec bonds has
risen by ~8bps only. We are building in higher provisioning expenses as well as
higher opex (to account for pension liabilities and salary hikes). Any significant
pressure on asset quality and higher-than-expected pension liability are key risks.
Outlook and top picks: While near-term headwinds (high inflation particularly
with rising commodities prices/interest rates) could weigh on earnings/stock
performance, we are positive on the sector in the long term as the loan outlook
remain robust and credit costs are likely to moderate in FY12. We are concerned
about the spike in deposit rates and continue to prefer banks with strong
liabilities franchisees. Improvement in liquidity due to higher government
spending would be a positive trigger. Our top picks in the sector remain SBIN,
BOB and AXSB among large caps and DBNK among mid-caps. Among NBFCs
we like Shriram Transport at current levels.
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