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Banks : Sector Outlook – A tale of two halves
We believe FY2012 is likely to be a tale of two halves, where the first half is likely to see weak
loan growth as well as margins. The weak loan growth should be more due to large amount of
telecom lending done in1HFY11, which is unlikely to be repeated in 1HFY12E. However, as
the year progresses, we expect loan growth to recover mainly as capex funding picks up.
Overall, FY2012 is likely to see slightly better loan growth than FY2011, in our view. Again the
sharp deposit rate hikes seen recently without a commensurate increase in lending rates are
likely to affect NIMs in 1HFY12, as deposits re-price with a lag. As a result, the first half will
have weaker margins and then banks are likely to see some recovery in the second half.
Opex issues due to pensions will also affect earnings growth prospects for PSU banks.
However, the biggest relief could be in the form of sharply declining credit costs, as asset
quality is likely to show significant improvements. We would recommend investors to remain
UW the sector, as we believe the near-term pains are not fully captured in prices.
Near-term margin pressures likely: Since June’10, commercial paper (CP) rates, which
are a proxy for wholesale funding rates, are up 330bps; banks have hiked retail deposit
rates by more than 200bps since June 2010. Banks’ base rates – the new system by which
all new loans are sanctioned with respect to the base rate as the reference rate – have
changed by 50bps at best. The PLR (substantial portion of loans are still linked to PLR –
the old lending rate system) has been increased by around 75bp. So clearly we see that
lending rate increases have not kept pace with retail deposit rates as well as wholesale
funding rate increases. We expect margins to be under pressure in the near term.
The opex burden could severely dent profits in case of PSU banks: We believe consensus
has yet to adequately capture the impact of the second option of pension being given to
the employees of state-owned banks. In the early 1990s, bank employees were given an
option to select between Provident Fund (PF) and pension. The pension option has always
been a more lucrative option than PF. In the recently concluded wage negotiation,
employees who had opted for PF for the first time will again be given an option to switch to
pensions. The impact of gratuity and pensions for most banks is greater than 10% of net
worth, and banks are likely to amortise the pension impact over a period of five years. As a
result, FY2012 is likely to see a huge jump in pension provisions (consequently operating
expenses) as many PSU banks are yet to provision for the second option of pension.
Asset quality - lower slippages should lead to lower credit costs: We expect a 20bp
decline in credit costs in FY12 over FY11 and that could offset partially the impact due to
lower margins and higher opex. Credit costs of both private and PSU banks should decline
as the incremental delinquencies should ease toward second half of 2011. The decline in
the case of PSU banks could be sharp, in our view, as many of the restructured loans will
have already turned into NPLs by FY2011E. Corporate asset quality is likely to be far
better in 2012 than 2011 and that should result in lower credit costs for PSU banks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks : Sector Outlook – A tale of two halves
We believe FY2012 is likely to be a tale of two halves, where the first half is likely to see weak
loan growth as well as margins. The weak loan growth should be more due to large amount of
telecom lending done in1HFY11, which is unlikely to be repeated in 1HFY12E. However, as
the year progresses, we expect loan growth to recover mainly as capex funding picks up.
Overall, FY2012 is likely to see slightly better loan growth than FY2011, in our view. Again the
sharp deposit rate hikes seen recently without a commensurate increase in lending rates are
likely to affect NIMs in 1HFY12, as deposits re-price with a lag. As a result, the first half will
have weaker margins and then banks are likely to see some recovery in the second half.
Opex issues due to pensions will also affect earnings growth prospects for PSU banks.
However, the biggest relief could be in the form of sharply declining credit costs, as asset
quality is likely to show significant improvements. We would recommend investors to remain
UW the sector, as we believe the near-term pains are not fully captured in prices.
Near-term margin pressures likely: Since June’10, commercial paper (CP) rates, which
are a proxy for wholesale funding rates, are up 330bps; banks have hiked retail deposit
rates by more than 200bps since June 2010. Banks’ base rates – the new system by which
all new loans are sanctioned with respect to the base rate as the reference rate – have
changed by 50bps at best. The PLR (substantial portion of loans are still linked to PLR –
the old lending rate system) has been increased by around 75bp. So clearly we see that
lending rate increases have not kept pace with retail deposit rates as well as wholesale
funding rate increases. We expect margins to be under pressure in the near term.
The opex burden could severely dent profits in case of PSU banks: We believe consensus
has yet to adequately capture the impact of the second option of pension being given to
the employees of state-owned banks. In the early 1990s, bank employees were given an
option to select between Provident Fund (PF) and pension. The pension option has always
been a more lucrative option than PF. In the recently concluded wage negotiation,
employees who had opted for PF for the first time will again be given an option to switch to
pensions. The impact of gratuity and pensions for most banks is greater than 10% of net
worth, and banks are likely to amortise the pension impact over a period of five years. As a
result, FY2012 is likely to see a huge jump in pension provisions (consequently operating
expenses) as many PSU banks are yet to provision for the second option of pension.
Asset quality - lower slippages should lead to lower credit costs: We expect a 20bp
decline in credit costs in FY12 over FY11 and that could offset partially the impact due to
lower margins and higher opex. Credit costs of both private and PSU banks should decline
as the incremental delinquencies should ease toward second half of 2011. The decline in
the case of PSU banks could be sharp, in our view, as many of the restructured loans will
have already turned into NPLs by FY2011E. Corporate asset quality is likely to be far
better in 2012 than 2011 and that should result in lower credit costs for PSU banks.
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