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Banks/Financial Institutions
India
4QFY11 preview: Likely strong operating performance barring minor irritants.
We expect the core performance for banks to remain strong aided by impressive loan
growth (23% yoy) and higher yoy margins. Staff expenses on retirement benefits and
the new regime on slippages (proscribing manual interference) would be key items to
look into in public sector banks. NBFCs will likely report some moderation in margins
even as loan growth continues to remain strong. Valuations are comfortable, our top
picks are PNB, ICICI Bank, Union Bank, Axis Bank and Federal Bank.
Earnings to remain strong on the back of lower base and impressive operating performance
We expect earnings to remain strong on the back of strong operating performance and a lower
base (mainly of ICICI Bank and SBI). Non interest income will remain subdued, as treasury gains
will be limited. NII growth to be impressive at 27% yoy (30% for public banks and 20% for private
banks) while overall profit growth is expected to be robust at 30% yoy, private banks would grow
by 37% compared to 27% for public sector banks. We expect lower loan loss provisions, but
operating expenses are likely to remain high for public banks. NBFCs will likely report 20-30% core
earnings growth, primarily on the back of strong loan growth even as margins moderate.
We expect BoI, IOB, Canara and SBI in public sector and most private sector banks to show
earnings growth over 25% yoy, aided by lower base earnings.
Margins to remain strong; loan growth higher than our earlier estimates
We expect overall margins to remain strong, even as we expect marginal qoq compression. The
aggressive hikes in lending rates in December 2010 and January 2011 will cushion the sharp rise in
deposit rates, especially wholesale deposits. As of March 11, 2011, the loan deposit ratio has been
stable at 75%, however, the incremental CD ratio for 4Q is lower than 55%. Loan growth will be
ahead of our initial estimates, driven largely by working capital demand over the past 3-6 months.
Margins for NBFCs have likely peaked; we expect some moderation from 3QFY11 levels for most
NBFCs. The seasonal trend of expansion in margins of NBFCs in 4Q may not be visible this year.
Asset quality may see some minor irritants; but overall trending very well
We expect slippages to trend better than previous quarters, even as we expect some higher
slippages for public banks, especially emanating due to a changeover to a more rigorous
recognition system that prevents any form of manual intervention (currently for loans above `5 mn
and all loans from September, 2011). However, discussions with banks indicate that recoveries
have improved cushioning a sharp rise in overall NPLs. Overall, gross NPLs ratios will likely remain
stable qoq and may even improve for few banks (SBI and ICICI Bank). We expect provisions to
remain high on account of this transition, while the private sector will see a further decline from
the previous quarter as their slippages are likely to be lower sequentially.
Costs to increase on account of earlier recognition of staff costs for retired employees
Guidelines issued during the quarter requiring banks to provide complete costs for retired
employees as against amortization benefit of five years for employees under service would result in
higher costs during the current quarter. Sharp impact is likely to be felt on few PSU banks like
Union Bank and Indian Bank while others would likely use their excess gratuity provisions for these
costs. We see this guideline impacting timing of recognition rather than our estimates (revision
will result in lower staff costs in FY2012).
NBFC: Signs of margin pressure
We believe NBFCs will report 20-25% core earnings growth primarily driven by higher
business volumes.
Marginal borrowing cost at the shorter end of the yield curve has increased by about 3-
4%+ over the past six months. We expect NIMs to shrink in the current scenario given the
delay in passing higher interest rates to customers, most NBFCs have raised their lending
rates, but not yet fully passed-on the rise in borrowings cost. However, loan sell down to
banks (at low interest rates) in 2HFY11 will support margins for auto finance companies
(Shriram Transport Finance and Mahindra Finance). Even as short term rates may ease in
April (a seasonally lean month), we expect management guidance on NIMs to be cautious
as the impact of higher rates is yet to be reflected in the reported margins.
We do not expect any significant movement on asset quality performance during the
current quarter.
Net earnings trend to remain strong for most banks
Loan growth somewhat moderating at 3% qoq; yoy growth healthy at 23%
Despite a seasonally strong quarter, loan growth was a bit subdued at 2.5% qoq till March
11, 2011 with another reporting fortnight left (which is likely to remain very strong). Yoy
growth continues to remain healthy at 23% despite the higher base impact. Deposit growth
has improved with sequential growth of about 3.5% with yoy growth remaining well below
credit growth at 17%. CD ratio as of March 2011, was at 75% though the incremental CD
ratio for the quarter was lower at 55%.
Bank investments in commercial paper declined by 60% qoq to `134 bn while investments
in corporate debentures have increased by about 7% qoq to `880 bn. We believe that some
portion of credit which was channelized through commercial papers in the previous quarters
on the back of surplus liquidity has come back to banks resulting in higher loan growth.
However, borrowings through external credit / short term credit from abroad continued to
remain strong.
NII growth to remain over 25%; NIMs to witness marginal pressure
We expect overall NII growth to remain over 25% yoy in the current quarter as the hikes in
their lending rates (December, 2010 and January, 2011) should offset the sharp rise in
deposit rates, especially for shorter tenors. Sequentially, we expect NIMs to come off
marginally for most banks by about 10 bps.
Public sector banks will continue to drive growth in NII at about 30% yoy as margins are
comparatively higher compared to 4QFY10 while private banks would see NII growth of
20% yoy. BoB, SBI, Canara and IOB amongst public sector banks and Yes Bank amongst
private banks will report NII growth of over 30%. Federal Bank and OBC will report weak NII
growth largely on back of slower balance sheet growth or higher compression of margins.
We expect margins to decline further in 1QFY12 as deposit rates have increased by over 100
bps in various tenors but to remain structurally higher
Subdued non interest income; limited treasury gains
Non interest income to remain subdued on the back of lower treasury gains but fee income
growth is likely to remain steady on the back of improved loan book activity while income
from off balance sheet activities (LC/BG/Forex) should remain healthy due to a lower base
and improvement in economic environment.
There have been limited opportunities for banks to have made gains on their investment
portfolio during the quarter. During the quarter, the yield curve flattened further with the 10
-year and 5-year increasing by 4 bps and 7 bps qoq while the 2-year has increased by about
13 bps and 1-year G-Sec increased by 20 bps. The 10-year rallied by nearly 30 bps from the
peak in the current quarter.
Asset quality appears comfortable despite a new regime in place
We believe asset quality is unlikely to underperform estimates (but expect overall NPL level to
rise further for public banks). We expect slippages to continue at higher levels for PSU banks
as they would report NPLs without any manual intervention for loans above `5 mn. The
complete transition is expected be completed by September 2011. Slippages from the
restructured portfolio are likely to continue during the quarter but we don’t expect any
sharp deterioration as we complete nearly two years post restructuring with significant
improvement in operating environment. We would also shift focus towards recoveries and
upgradations given the underlying environment. We see almost negligible impact from
microfinance in the current quarter
Provisions would continue at high levels at 3QFY11 levels for public sector banks while large
private banks would see a decline sequentially. Sharp improvement in recoveries/
upgradations would result in lower NPL provisions for the quarter.
Opex to increase due to earlier recognition of staff costs for retired employees
Guidelines issued during the quarter requiring banks to provide complete costs for retired
employees as against amortization benefit of five years for employees under service would
result in higher costs during the current quarter. We expect operating expenses to increase
by 14% qoq with staff expenses increasing by 19%- PSU banks will likely see about 22%
qoq growth in staff expenses. Sharp impact is likely to be felt on few PSU banks like Union
Bank and Indian Bank while others would likely use their excess gratuity provisions for these
costs. We see this guideline impacting timing of recognition rather than our estimates
(revision will result in lower staff costs in FY2012).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks/Financial Institutions
India
4QFY11 preview: Likely strong operating performance barring minor irritants.
We expect the core performance for banks to remain strong aided by impressive loan
growth (23% yoy) and higher yoy margins. Staff expenses on retirement benefits and
the new regime on slippages (proscribing manual interference) would be key items to
look into in public sector banks. NBFCs will likely report some moderation in margins
even as loan growth continues to remain strong. Valuations are comfortable, our top
picks are PNB, ICICI Bank, Union Bank, Axis Bank and Federal Bank.
Earnings to remain strong on the back of lower base and impressive operating performance
We expect earnings to remain strong on the back of strong operating performance and a lower
base (mainly of ICICI Bank and SBI). Non interest income will remain subdued, as treasury gains
will be limited. NII growth to be impressive at 27% yoy (30% for public banks and 20% for private
banks) while overall profit growth is expected to be robust at 30% yoy, private banks would grow
by 37% compared to 27% for public sector banks. We expect lower loan loss provisions, but
operating expenses are likely to remain high for public banks. NBFCs will likely report 20-30% core
earnings growth, primarily on the back of strong loan growth even as margins moderate.
We expect BoI, IOB, Canara and SBI in public sector and most private sector banks to show
earnings growth over 25% yoy, aided by lower base earnings.
Margins to remain strong; loan growth higher than our earlier estimates
We expect overall margins to remain strong, even as we expect marginal qoq compression. The
aggressive hikes in lending rates in December 2010 and January 2011 will cushion the sharp rise in
deposit rates, especially wholesale deposits. As of March 11, 2011, the loan deposit ratio has been
stable at 75%, however, the incremental CD ratio for 4Q is lower than 55%. Loan growth will be
ahead of our initial estimates, driven largely by working capital demand over the past 3-6 months.
Margins for NBFCs have likely peaked; we expect some moderation from 3QFY11 levels for most
NBFCs. The seasonal trend of expansion in margins of NBFCs in 4Q may not be visible this year.
Asset quality may see some minor irritants; but overall trending very well
We expect slippages to trend better than previous quarters, even as we expect some higher
slippages for public banks, especially emanating due to a changeover to a more rigorous
recognition system that prevents any form of manual intervention (currently for loans above `5 mn
and all loans from September, 2011). However, discussions with banks indicate that recoveries
have improved cushioning a sharp rise in overall NPLs. Overall, gross NPLs ratios will likely remain
stable qoq and may even improve for few banks (SBI and ICICI Bank). We expect provisions to
remain high on account of this transition, while the private sector will see a further decline from
the previous quarter as their slippages are likely to be lower sequentially.
Costs to increase on account of earlier recognition of staff costs for retired employees
Guidelines issued during the quarter requiring banks to provide complete costs for retired
employees as against amortization benefit of five years for employees under service would result in
higher costs during the current quarter. Sharp impact is likely to be felt on few PSU banks like
Union Bank and Indian Bank while others would likely use their excess gratuity provisions for these
costs. We see this guideline impacting timing of recognition rather than our estimates (revision
will result in lower staff costs in FY2012).
NBFC: Signs of margin pressure
We believe NBFCs will report 20-25% core earnings growth primarily driven by higher
business volumes.
Marginal borrowing cost at the shorter end of the yield curve has increased by about 3-
4%+ over the past six months. We expect NIMs to shrink in the current scenario given the
delay in passing higher interest rates to customers, most NBFCs have raised their lending
rates, but not yet fully passed-on the rise in borrowings cost. However, loan sell down to
banks (at low interest rates) in 2HFY11 will support margins for auto finance companies
(Shriram Transport Finance and Mahindra Finance). Even as short term rates may ease in
April (a seasonally lean month), we expect management guidance on NIMs to be cautious
as the impact of higher rates is yet to be reflected in the reported margins.
We do not expect any significant movement on asset quality performance during the
current quarter.
Net earnings trend to remain strong for most banks
Loan growth somewhat moderating at 3% qoq; yoy growth healthy at 23%
Despite a seasonally strong quarter, loan growth was a bit subdued at 2.5% qoq till March
11, 2011 with another reporting fortnight left (which is likely to remain very strong). Yoy
growth continues to remain healthy at 23% despite the higher base impact. Deposit growth
has improved with sequential growth of about 3.5% with yoy growth remaining well below
credit growth at 17%. CD ratio as of March 2011, was at 75% though the incremental CD
ratio for the quarter was lower at 55%.
Bank investments in commercial paper declined by 60% qoq to `134 bn while investments
in corporate debentures have increased by about 7% qoq to `880 bn. We believe that some
portion of credit which was channelized through commercial papers in the previous quarters
on the back of surplus liquidity has come back to banks resulting in higher loan growth.
However, borrowings through external credit / short term credit from abroad continued to
remain strong.
NII growth to remain over 25%; NIMs to witness marginal pressure
We expect overall NII growth to remain over 25% yoy in the current quarter as the hikes in
their lending rates (December, 2010 and January, 2011) should offset the sharp rise in
deposit rates, especially for shorter tenors. Sequentially, we expect NIMs to come off
marginally for most banks by about 10 bps.
Public sector banks will continue to drive growth in NII at about 30% yoy as margins are
comparatively higher compared to 4QFY10 while private banks would see NII growth of
20% yoy. BoB, SBI, Canara and IOB amongst public sector banks and Yes Bank amongst
private banks will report NII growth of over 30%. Federal Bank and OBC will report weak NII
growth largely on back of slower balance sheet growth or higher compression of margins.
We expect margins to decline further in 1QFY12 as deposit rates have increased by over 100
bps in various tenors but to remain structurally higher
Subdued non interest income; limited treasury gains
Non interest income to remain subdued on the back of lower treasury gains but fee income
growth is likely to remain steady on the back of improved loan book activity while income
from off balance sheet activities (LC/BG/Forex) should remain healthy due to a lower base
and improvement in economic environment.
There have been limited opportunities for banks to have made gains on their investment
portfolio during the quarter. During the quarter, the yield curve flattened further with the 10
-year and 5-year increasing by 4 bps and 7 bps qoq while the 2-year has increased by about
13 bps and 1-year G-Sec increased by 20 bps. The 10-year rallied by nearly 30 bps from the
peak in the current quarter.
Asset quality appears comfortable despite a new regime in place
We believe asset quality is unlikely to underperform estimates (but expect overall NPL level to
rise further for public banks). We expect slippages to continue at higher levels for PSU banks
as they would report NPLs without any manual intervention for loans above `5 mn. The
complete transition is expected be completed by September 2011. Slippages from the
restructured portfolio are likely to continue during the quarter but we don’t expect any
sharp deterioration as we complete nearly two years post restructuring with significant
improvement in operating environment. We would also shift focus towards recoveries and
upgradations given the underlying environment. We see almost negligible impact from
microfinance in the current quarter
Provisions would continue at high levels at 3QFY11 levels for public sector banks while large
private banks would see a decline sequentially. Sharp improvement in recoveries/
upgradations would result in lower NPL provisions for the quarter.
Opex to increase due to earlier recognition of staff costs for retired employees
Guidelines issued during the quarter requiring banks to provide complete costs for retired
employees as against amortization benefit of five years for employees under service would
result in higher costs during the current quarter. We expect operating expenses to increase
by 14% qoq with staff expenses increasing by 19%- PSU banks will likely see about 22%
qoq growth in staff expenses. Sharp impact is likely to be felt on few PSU banks like Union
Bank and Indian Bank while others would likely use their excess gratuity provisions for these
costs. We see this guideline impacting timing of recognition rather than our estimates
(revision will result in lower staff costs in FY2012).
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