Credit Suisse, India Financial 4Q11 – NIM moderation, asset quality strong, watch out for Opex

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India Financial Sector -------------------------------------------------- Maintain MARKET WEIGHT
4Q11 – NIM moderation, asset quality strong, watch out for Opex


● The 4Q results for Indian banks are likely to reflect the beginning
of margin pressures while asset quality trends are expected to be
strong. Operating expenses could surprise on the downside
● With incremental loan-deposit ratios during the quarter moderating
to 75% (with no further room to expand) from 100%+ levels in 3Q
and the re-pricing of deposit costs kicking in (happens with a lag),
we expect the margins to drop by 10-15 bp QoQ in 4Q. Margins
are likely to drop further by 20-30 bp over the next two quarters.
● With a healthy system loan growth of 21% this quarter and a low
base in 4Q10 (higher credit costs), we expect bank earnings to
grow a strong 39% YoY (42%: govt. banks, 34%: private) in 4Q11.
● Loan loss provisions are expected to be flat QoQ. ICICI is likely to
witness continued moderation in credit costs while SBI’s slippages
are likely to drop (versus high 2.5% levels over the past two qtrs).
● ICICI (stable margins, declining provs); BOB (continued low provs,
stable margins) and United Bank (improving asset quality, credit
growth) are preferred plays around results. Stock perf. of Yes,
IDFC (wholesale funded) that are likely to witness asset growth
moderation may be under pressure from these results.

Robust loan growth
Loan growth for 4Q was healthy at 21% YoY (on 25 Mar, 2011) driven
by a healthy 5% QoQ growth. Deposit growth continues to lag credit
growth (16% YoY) and loan-deposit ratio was at a historic high of 76%.
NIMs have peaked out in 3Q
With incremental loan-deposit ratios during the quarter moderating to
75% from 100%+ levels in 3Q (as there is no further room) and as repricing
of deposit costs kicking in, we expect the margins to drop by
10-15 bp QoQ in 4Q (ICICI, HDFC Bank are likely to maintain flattish
margins). We expect the banks to further witness a 20-30 bp drop in
margins over the next two quarters. Spreads for wholesale funded
entities (Yes Bank, IDFC) are likely to remain under pressure.
Asset quality to be strong
We expect the overall loan loss provisions to be flat QoQ (credit costs
of 0.8%). Asset quality is likely to improve (on a sequential basis) at
SBI (slippages of 2.5% levels over past 2 quarters), ICICI, Union.
Operating expenses can surprise negatively
RBI has asked banks to make provisions (second pension option) for
retired employees (who have opted recently) by March 2011. The
banks are currently negotiating for delay / amortisation of this amount.
While we are currently not factoring these estimates, these provisions
can lead to a 10-20% lower earnings for government banks.