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Banks/Financial Institutions
India
3QFY11 review – earnings remain strong; better than expected. Key trends
observed during 3QFY11 (1) cost of funds were stable but higher lending yields and
expansion in CD ratio results in better margins, (2) loan growth was impressive, (3)
subdued non-interest income led by lower treasury gains and weak core fee growth, (4)
asset quality also showed improvement with lower additions and (5) retirement costs
showed no negative surprises. NBFCs reported strong performance, but provide
cautious guidance. We like BOB, PNB and Union Bank as our best picks. Like Axis and
ICICI Bank amongst private banks. We would remain underweight on NBFCs.
Overall business growth impressive
Loan growth for the sector improved in 3Q, with a 7% qoq (26% yoy) for banks under coverage;
growth being broad-based, even as the contribution from infrastructure being relatively high. YTD
loan growth is at 15% with balanced performance from public and private banks. We maintain
our loan growth assumption at 20% in FY2011E but revise downwards to 18% CAGR for
FY2012-13E as risks of lower growth on the back rising rates remain high.
Most NBFCs reported strong quarterly earnings; core earnings up 20-30%. Loan growth continued
to be robust and at all-time high levels for select companies (LICHF, MMFS).
Margins was a positive surprise, amidst fears of margin pressures
Margins during 3Q further increased and were ahead of our estimates. Positive margins were
driven by stable funding costs, improvement in lending yields and expansion in loan-deposit ratio.
Pricing power was evident, as banks raised lending rates having an immediate impact on loan
yields, while deposits will re-price with a lag. A similar trend of strong pricing power continues in
4Q as well. Larger banks with better liability franchise (SBI, PNB, BOB, Axis) reported better
margins, while smaller and weak liability franchise (OBC, Yes) witnessed pressure on margins. Loan
deposit ratio (under coverage) is currently at 81% (100 bps increased over 2Q) a trend clearly
unsustainable. However, we remain conservative and build margins to decline by 10-15 bps in 4Q
and another 10-20 bps in FY2012E. Select NBFCs (STFC, LICHF) reported peak NIM. However, we
expect the margin impact to be visible over the next few quarters for most NBFCs.
Fresh additions to NPL is slowing down; net NPL declines qoq
Fresh additions to NPL slowed down for the quarter with gross NPL increasing by less than 2%
qoq, the slowest in recent quarters. Net NPL declined by 1% qoq. Slippages from the restructured
loans continued with overall slippages at 13% compared to 10% in 2Q. We have revised our loan
loss provisions downwards on the back of current performance.
Retirement costs largely in line with estimates with no real negative surprises
Cost-income ratios were broadly stable for the quarter despite most banks reporting their final
liability for retirement benefits. The impact on networth is about 10-13% of networth but charges
to P/L remains different pending clarification on accounting. We remain conservative on our cost
estimates as we factor 10-12% growth in FY2012E despite no changes to staff costs expected
next year and retirement costs fully reflected in earnings.
Pressure on NIM for NBFCs
NBFCs have reported strong quarterly performance but we believe that rising interest rate
scenario will likely put pressure on NIM. While liquidity was under pressure throughout the
quarter, interest rates increased sharply towards the end of the quarter. Most banks have
been revising PLR/ base rates since December 2010 which will likely impact borrowings cost
of NBFCs in next 1-2 quarters.
Most NBFCs have highlighted that they have a comfortable ALM position (surplus in next
1-2 quarters) and asset liability re-pricing is also not adverse (expect PFC and REC).
However, sharp rise in borrowings cost for incremental loans (which may not be possible
to passed-on fully) can put pressure on NIM, in our view.
According to market sources, most asset finance NBFCs have been mobilizing most of
their incremental funds though the priority sector route, i.e. refinancing loans to banks/
selling down loans to banks which classify as priority sector loans for the latter. We
believe that marginal borrowings cost can increase sharply for these companies once
banking sector’s appetite for these loans decreases, i.e. by 1QFY12 and in case the overall
liquidity scenario does not improve till then. As such, we would not be very positive on
the sector despite a sharp decline in most stocks.
Regulatory tightening for NBFCs
We expect RBI to increase regulatory tightening on NBFC and reduce the regulatory
arbitrage between banks and NBFCs. NBFCs have been growing rapidly over the last few
quarters and gradually gaining prominence in the financial sector which has likely made
the regulators more cautious towards the sector. The regulators (RBI and NHB) have
introduced the following regulations on NBFCs.
Standard asset provision of 0.25% for all NBFCs- this is the first time RBI has introduced
standard asset provisions for NBFCs. All large NBFCs that declared results after the
guidelines were announced (Jan 17, 2011) made a provision for standard assets for
3QFY11.
Standard asset provisions of 2% on teaser loans for housing finance companies – this
follows a similar move by the RBI to regulate home loan by banks.
RBI has clarified that gold loans refinanced to NBFCs/ bought from NBFCs under the
securitization route cannot be considered as agricultural loans in the priority sector
categorization for bank.
The Malegam committee submitted its report to the RBI on the back of the MFI Act in AP.
The Malegam committee proposes to classify microfinance companies as MFI-NBFCs,
proposes interest rate caps on these loans but these loans can be considered for priority
sector categorization by banks. Going forward, we expect RBI to review the priority sector
framework of the RBI (as suggested by the Malegam committee).
In light of the large fraud in the wealth management business of Citibank, we expect the
regulators to tighten controls in this sector as well.
Other operational highlights for the quarter
Non-interest income growth was subdued as treasury profits were substantially lower.
Core fee income growth was broadly muted compared to NII growth.
Limited provision was made during the quarter for AFS portfolio
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
3QFY11 review – earnings remain strong; better than expected. Key trends
observed during 3QFY11 (1) cost of funds were stable but higher lending yields and
expansion in CD ratio results in better margins, (2) loan growth was impressive, (3)
subdued non-interest income led by lower treasury gains and weak core fee growth, (4)
asset quality also showed improvement with lower additions and (5) retirement costs
showed no negative surprises. NBFCs reported strong performance, but provide
cautious guidance. We like BOB, PNB and Union Bank as our best picks. Like Axis and
ICICI Bank amongst private banks. We would remain underweight on NBFCs.
Overall business growth impressive
Loan growth for the sector improved in 3Q, with a 7% qoq (26% yoy) for banks under coverage;
growth being broad-based, even as the contribution from infrastructure being relatively high. YTD
loan growth is at 15% with balanced performance from public and private banks. We maintain
our loan growth assumption at 20% in FY2011E but revise downwards to 18% CAGR for
FY2012-13E as risks of lower growth on the back rising rates remain high.
Most NBFCs reported strong quarterly earnings; core earnings up 20-30%. Loan growth continued
to be robust and at all-time high levels for select companies (LICHF, MMFS).
Margins was a positive surprise, amidst fears of margin pressures
Margins during 3Q further increased and were ahead of our estimates. Positive margins were
driven by stable funding costs, improvement in lending yields and expansion in loan-deposit ratio.
Pricing power was evident, as banks raised lending rates having an immediate impact on loan
yields, while deposits will re-price with a lag. A similar trend of strong pricing power continues in
4Q as well. Larger banks with better liability franchise (SBI, PNB, BOB, Axis) reported better
margins, while smaller and weak liability franchise (OBC, Yes) witnessed pressure on margins. Loan
deposit ratio (under coverage) is currently at 81% (100 bps increased over 2Q) a trend clearly
unsustainable. However, we remain conservative and build margins to decline by 10-15 bps in 4Q
and another 10-20 bps in FY2012E. Select NBFCs (STFC, LICHF) reported peak NIM. However, we
expect the margin impact to be visible over the next few quarters for most NBFCs.
Fresh additions to NPL is slowing down; net NPL declines qoq
Fresh additions to NPL slowed down for the quarter with gross NPL increasing by less than 2%
qoq, the slowest in recent quarters. Net NPL declined by 1% qoq. Slippages from the restructured
loans continued with overall slippages at 13% compared to 10% in 2Q. We have revised our loan
loss provisions downwards on the back of current performance.
Retirement costs largely in line with estimates with no real negative surprises
Cost-income ratios were broadly stable for the quarter despite most banks reporting their final
liability for retirement benefits. The impact on networth is about 10-13% of networth but charges
to P/L remains different pending clarification on accounting. We remain conservative on our cost
estimates as we factor 10-12% growth in FY2012E despite no changes to staff costs expected
next year and retirement costs fully reflected in earnings.
Pressure on NIM for NBFCs
NBFCs have reported strong quarterly performance but we believe that rising interest rate
scenario will likely put pressure on NIM. While liquidity was under pressure throughout the
quarter, interest rates increased sharply towards the end of the quarter. Most banks have
been revising PLR/ base rates since December 2010 which will likely impact borrowings cost
of NBFCs in next 1-2 quarters.
Most NBFCs have highlighted that they have a comfortable ALM position (surplus in next
1-2 quarters) and asset liability re-pricing is also not adverse (expect PFC and REC).
However, sharp rise in borrowings cost for incremental loans (which may not be possible
to passed-on fully) can put pressure on NIM, in our view.
According to market sources, most asset finance NBFCs have been mobilizing most of
their incremental funds though the priority sector route, i.e. refinancing loans to banks/
selling down loans to banks which classify as priority sector loans for the latter. We
believe that marginal borrowings cost can increase sharply for these companies once
banking sector’s appetite for these loans decreases, i.e. by 1QFY12 and in case the overall
liquidity scenario does not improve till then. As such, we would not be very positive on
the sector despite a sharp decline in most stocks.
Regulatory tightening for NBFCs
We expect RBI to increase regulatory tightening on NBFC and reduce the regulatory
arbitrage between banks and NBFCs. NBFCs have been growing rapidly over the last few
quarters and gradually gaining prominence in the financial sector which has likely made
the regulators more cautious towards the sector. The regulators (RBI and NHB) have
introduced the following regulations on NBFCs.
Standard asset provision of 0.25% for all NBFCs- this is the first time RBI has introduced
standard asset provisions for NBFCs. All large NBFCs that declared results after the
guidelines were announced (Jan 17, 2011) made a provision for standard assets for
3QFY11.
Standard asset provisions of 2% on teaser loans for housing finance companies – this
follows a similar move by the RBI to regulate home loan by banks.
RBI has clarified that gold loans refinanced to NBFCs/ bought from NBFCs under the
securitization route cannot be considered as agricultural loans in the priority sector
categorization for bank.
The Malegam committee submitted its report to the RBI on the back of the MFI Act in AP.
The Malegam committee proposes to classify microfinance companies as MFI-NBFCs,
proposes interest rate caps on these loans but these loans can be considered for priority
sector categorization by banks. Going forward, we expect RBI to review the priority sector
framework of the RBI (as suggested by the Malegam committee).
In light of the large fraud in the wealth management business of Citibank, we expect the
regulators to tighten controls in this sector as well.
Other operational highlights for the quarter
Non-interest income growth was subdued as treasury profits were substantially lower.
Core fee income growth was broadly muted compared to NII growth.
Limited provision was made during the quarter for AFS portfolio
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