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India Equity Research Reports, IPO and Stock News
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Banks’ earnings to be under pressure: Consensus view
It is widely believed (almost a consensus view) that pressure will build up on
banking sector earnings going forward due to: (a) adverse impact of rising deposit
rates on margins; (b) lower investment spreads; (c) MTM depreciation risk due to
upward pressure on bond yields; and (d) risk to credit growth in rising interest
rate and relatively lower deposit mobilisation environment. We have done detailed
analysis on some of the pressure points viz., NIMs, investment depreciation, and
pension hit to understand the impact of these headwinds on earnings and RoEs.
Margin analysis suggests headwinds not a dampener for quality names
Looking into the margin behavior of various banks across cycles (from FY03 to
FY11) and dissecting margins into various components, viz.,
asset/liability/investment repricing, LDR and CASA benefit etc., suggests that
strong liability franchises (PNB, Union, HDFC Bank) should be able to navigate
through the pain with minimal impact, whereas the impact could be more
pronounced for relatively weaker franchises (OBC, IOB etc.,) which run the risk of
unwinding large part of margin improvement. Sensitivity analysis on margins
depicts that 20bps decline in NIMs (above our base case estimate of >25bps) will
hit earnings 9-12%. Risk of investment depreciation will be higher for Indian
Overseas Bank, Oriental Bank of Commerce, and Axis Bank. With respect to
pension liability, RBI’s requirement to charge liability for retired employees in the
first year itself will impact FY11 PBT 3-5% on an average. Despite these
headwinds, quality names like PNB, Union, BoB will continue to report above
average RoEs of 20% plus, leading us to believe that the risk-reward is favorable.
Near-term macro challenges are here to stay
Gyrating to macro headwinds on high and sticky inflation, weak trade deficit, tight
liquidity, rising interest rates coupled with dampened sentiments due to issues
related to the loan–for-money scam, microfinance, etc., banking stocks took a
beating, underperforming the broader market 4% over the past three months. We
believe near-term macro challenges are here to stay: (1) inflation pressure to
continue, stickiness in some food and non-food articles; (2) trade deficit at
elevated levels; crude/commodity prices crucial in shaping the trend; and
(3) RBI’s tightening stance will continue till inflation reaches comfort zone.
Valuations getting into comfort zone; risk-reward turning favorable
Correction in banking stocks over the past three months has led to banking stocks
reaching attractive valuations, closer to their historical averages. We strongly
believe that we are far from the situation during the Lehman crisis when banking
stocks were trading at historic lows, reflecting times of extreme stress. In our
sector note, Move to Safer Haven, dated November 26, 2010, our top bets were
HDFC Bank and Bank of Baroda (BoB) which have outperformed the bankex 3-6%
over the past three months, once again reinforcing our belief that these are the
best bets in times of adversity despite high valuation. We believe the risk-reward
is favorable for quality names and our top picks are Axis Bank, ICICI Bank, PNB,
and BoB. We would still avoid smaller PSBs given the risk of unwinding of cyclical
margin improvement, higher pension cost, and investment depreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Banks’ earnings to be under pressure: Consensus view
It is widely believed (almost a consensus view) that pressure will build up on
banking sector earnings going forward due to: (a) adverse impact of rising deposit
rates on margins; (b) lower investment spreads; (c) MTM depreciation risk due to
upward pressure on bond yields; and (d) risk to credit growth in rising interest
rate and relatively lower deposit mobilisation environment. We have done detailed
analysis on some of the pressure points viz., NIMs, investment depreciation, and
pension hit to understand the impact of these headwinds on earnings and RoEs.
Margin analysis suggests headwinds not a dampener for quality names
Looking into the margin behavior of various banks across cycles (from FY03 to
FY11) and dissecting margins into various components, viz.,
asset/liability/investment repricing, LDR and CASA benefit etc., suggests that
strong liability franchises (PNB, Union, HDFC Bank) should be able to navigate
through the pain with minimal impact, whereas the impact could be more
pronounced for relatively weaker franchises (OBC, IOB etc.,) which run the risk of
unwinding large part of margin improvement. Sensitivity analysis on margins
depicts that 20bps decline in NIMs (above our base case estimate of >25bps) will
hit earnings 9-12%. Risk of investment depreciation will be higher for Indian
Overseas Bank, Oriental Bank of Commerce, and Axis Bank. With respect to
pension liability, RBI’s requirement to charge liability for retired employees in the
first year itself will impact FY11 PBT 3-5% on an average. Despite these
headwinds, quality names like PNB, Union, BoB will continue to report above
average RoEs of 20% plus, leading us to believe that the risk-reward is favorable.
Near-term macro challenges are here to stay
Gyrating to macro headwinds on high and sticky inflation, weak trade deficit, tight
liquidity, rising interest rates coupled with dampened sentiments due to issues
related to the loan–for-money scam, microfinance, etc., banking stocks took a
beating, underperforming the broader market 4% over the past three months. We
believe near-term macro challenges are here to stay: (1) inflation pressure to
continue, stickiness in some food and non-food articles; (2) trade deficit at
elevated levels; crude/commodity prices crucial in shaping the trend; and
(3) RBI’s tightening stance will continue till inflation reaches comfort zone.
Valuations getting into comfort zone; risk-reward turning favorable
Correction in banking stocks over the past three months has led to banking stocks
reaching attractive valuations, closer to their historical averages. We strongly
believe that we are far from the situation during the Lehman crisis when banking
stocks were trading at historic lows, reflecting times of extreme stress. In our
sector note, Move to Safer Haven, dated November 26, 2010, our top bets were
HDFC Bank and Bank of Baroda (BoB) which have outperformed the bankex 3-6%
over the past three months, once again reinforcing our belief that these are the
best bets in times of adversity despite high valuation. We believe the risk-reward
is favorable for quality names and our top picks are Axis Bank, ICICI Bank, PNB,
and BoB. We would still avoid smaller PSBs given the risk of unwinding of cyclical
margin improvement, higher pension cost, and investment depreciation.
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