Goldman Sachs: Financial Services - Sensitizing earnings and valuations to lower NIMs, higher provisions Given concerns relating to margin pressure and NPLs, we provide the impact of lower margins and higher provisions on both earnings and valuations of companies under our coverage. When analyzing the extent of the impact to target prices it is important to highlight: (1) The estimated decline in earnings for banks will be influenced by current margins and provisions. For example we assume a uniform 30 bp increase in banks provisions and a 20 bp hit on margins in FY12E and FY13E. For a bank already making high provisions, for example 1.5%, this impact will be less versus a bank currently making a 60 bp provisions. Similarly, a bank earning a higher margin of say 4% will see less of an impact to earnings versus a bank which generates lower margin, for example 2%. (2) The value driven by BVPS, high growth phase and terminal value. For banks where a large part of this value is driven by the second stage and terminal year growth, the impact will be low versus a bank where a significant portion of value is driven by its BVPS. Importantly, the decline in NIM for banks will most likely not be uniform and may depend on CASA ratio, ability to retain CASA ratio, wholesale versus retail funding. Similarly provisions could differ depending on the asset quality of various banks/finance companies. Our analysis should therefore be used as an indicative measure in understanding the potential risk to earnings and valuations.

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India: Financial Services 
Equity Research
Ascertaining risk to valuations from lower NIMs, higher provisions 
Stocks to remain in narrow range given macro risk
Indian banking stocks have yo-yoed in recent trading and we believe they
could remain range bound and volatile. Valuations are more reasonable
versus mid-September levels, but still remain above average. We believe
concerns relating to liquidity, rising interest rates, likely impact on growth
and downside risk to earnings (from NIM pressure, slower growth and/or
higher provisions) may lead to further volatility in stock prices.

Impact on PAT from lower NIM, higher NPL provisions significant
We believe banks’ margins could fall by a minimum of 15-20 bp with
further fall possible if there is a significant shift in deposits from savings
account to fixed deposits and/or depositors shift funds from low-yielding
term deposits to higher-yielding term deposits. Banks are now also seeing
increasing competition from fixed-maturity plans from mutual funds. Our
analysis shows that an additional 20 bp reduction in NIMs in FY12E and
FY13E could lead to 8%-15% earnings sensitivity for banks (lower for
NBFCs). Additionally, higher credit costs of 30 bp in FY13E due to higher
interest costs and slower economic activity could impact EPS by 7%-15.5%.
Target price sensitivity high to rf rate less to margin and provisions
Our sensitivity analysis shows that target prices are most sensitive to the riskfree rates (which are not factored into our current assumptions) and relatively
less to near term earnings. Based on our analysis we find banks with higher
margins and lower credit costs and more value being driven by high growth
stage and terminal value could have more upside. INBK and YESB have
maximum upside while BOI and SBI have the maximum downside post our
sensitivity analysis. We have revised our FY11-FY13E estimates for HDBK,
KTKM, SRTR and BOI post 3QFY11 results by between -4.4% to +1.9%.
Consequently we revise our 12-m target prices by between -4% to -2%.
Top-picks: IndusInd Bank and Yes Bank
While near term risks remain, we find significant upside in our top-picks:
(1) INBK - (43% potential upside) with 34% earnings CAGR FY10-FY13E,
strong business model, focus on CASA. (2) YESB - (34% potential upside),
32% earnings CAGR FY10-FY13E, possible CASA improvement as bank
moderates growth. (3) ICBK - (18% potential upside) on likelihood of
earnings surprise. (4) PNBK and BOB on reasonable valuations vs. earnings
growth and RoEs (30% and 22% potential upside, respectively).


Sensitizing earnings and valuations to lower NIMs, higher
provisions
Given concerns relating to margin pressure and NPLs, we provide the impact of lower
margins and higher provisions on both earnings and valuations of companies under our
coverage. When analyzing the extent of the impact to target prices it is important to
highlight:
(1) The estimated decline in earnings for banks will be influenced by current margins and
provisions. For example we assume a uniform 30 bp increase in banks provisions and
a 20 bp hit on margins in FY12E and FY13E.  For a bank already making high provisions,
for example 1.5%, this impact will be less versus a bank currently making a 60 bp
provisions. Similarly, a bank earning a higher margin of say 4% will see less of an
impact to earnings versus a bank which generates lower margin, for example 2%.
(2) The value driven by BVPS, high growth phase and terminal value. For banks where a
large part of this value is driven by the second stage and terminal year growth, the
impact will be low versus a bank where a significant portion of value is driven by its
BVPS.
Importantly, the decline in NIM for banks will most likely not be uniform and may depend
on CASA ratio, ability to retain CASA ratio, wholesale versus retail funding. Similarly
provisions could differ depending on the asset quality of various banks/finance companies.
Our analysis should therefore be used as an indicative measure in understanding the
potential risk to earnings and valuations.