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India Equity Research Reports, IPO and Stock News
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Indian Banks
4Q11: Looking at the quarter gone by
Event
�� We summarise the 4QFY11 results for banks and financials and also
comment on what is to be expected going ahead.
Impact
�� Significant margin compression yet to happen for banks: Banks largely
haven’t witnessed any significant margin compression this quarter, as lending
rate hikes have protected margins and deposit re-pricing has yet to catch up.
On average, the cost of funds was up 35bps QoQ for banks less reliant on
wholesale funding. Margins compressed roughly only 10bps QoQ on average
for these banks. As far as wholesale-funded institutions and banks dependent
more on wholesale deposits were concerned, cost of funds moved up by 50-
60bps QoQ and margin compression was severe at 45-50bps QoQ.
�� Asset quality pains continue for PSU banks: PSU banks continue to face
issues with respect to asset quality due a sharp rise in slippage/delinquencies
due to restructured assets and moving to online method of classification of
NPLs. Private Banks, on the other hand, due to their large retail portfolio
(where NPLs have already peaked) witnessed lower delinquencies this
quarter and asset quality improved further.
�� Opex was the big negative surprise for PSU banks this quarter: PSU
banks had to take pension provisions for the retirees upfront this quarter,
which bloated opex. The one-time pension hit due to retirees constituted
nearly 10% of FY11 profits. Some of them managed to report a lower opex by
writing back the gratuity provisions done in earlier quarters, as RBI had
allowed them to be amortised over five years.
�� What to look forward going ahead – 1QFY12 and subsequent quarters:
We expect the deposit re-pricing plus the savings rate increase to result in
roughly 25bps NIM compression for banks, especially the PSUs, in 1QFY12.
Note that lending rate hikes in 1QFY12 were done mid-quarter and hence the
full impact will be felt only in 2QFY12. Loan growth is also expected to be
weak, on top of which we expect pressure on asset quality due to restructured
assets to continue for one more quarter, as the principal moratorium on some
restructured assets will continue to be there till June-2011. Also the deadline
for migration to online (CBS) method of classification of NPLs is extended till
Sep-2011 and hence more NPLs are likely to come out. To summarise,
1QFY12 results are expected to be bad for the sector and we don’t rule out
the possibility of negative surprises.
Outlook
�� Wait for 1QFY12 to buy banks: We believe 1QFY12 results for banks
especially for PSUs is expected to be bad, and we don’t think that the bad
numbers are fully priced in. Hence around July ’11 we believe there could be
a better entry point into the sector. Valuations are getting to look cheap now.
Hence from a 12-18m perspective we are fine accumulating on corrections.
The positive surprise on earnings could happen in second half – due to lower
credit costs and opex in our view. Our top picks are Union Bank of India and
PNB in the PSU space and amongst the privates we like ICICI Bank and
HDFC Bank.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Banks
4Q11: Looking at the quarter gone by
Event
�� We summarise the 4QFY11 results for banks and financials and also
comment on what is to be expected going ahead.
Impact
�� Significant margin compression yet to happen for banks: Banks largely
haven’t witnessed any significant margin compression this quarter, as lending
rate hikes have protected margins and deposit re-pricing has yet to catch up.
On average, the cost of funds was up 35bps QoQ for banks less reliant on
wholesale funding. Margins compressed roughly only 10bps QoQ on average
for these banks. As far as wholesale-funded institutions and banks dependent
more on wholesale deposits were concerned, cost of funds moved up by 50-
60bps QoQ and margin compression was severe at 45-50bps QoQ.
�� Asset quality pains continue for PSU banks: PSU banks continue to face
issues with respect to asset quality due a sharp rise in slippage/delinquencies
due to restructured assets and moving to online method of classification of
NPLs. Private Banks, on the other hand, due to their large retail portfolio
(where NPLs have already peaked) witnessed lower delinquencies this
quarter and asset quality improved further.
�� Opex was the big negative surprise for PSU banks this quarter: PSU
banks had to take pension provisions for the retirees upfront this quarter,
which bloated opex. The one-time pension hit due to retirees constituted
nearly 10% of FY11 profits. Some of them managed to report a lower opex by
writing back the gratuity provisions done in earlier quarters, as RBI had
allowed them to be amortised over five years.
�� What to look forward going ahead – 1QFY12 and subsequent quarters:
We expect the deposit re-pricing plus the savings rate increase to result in
roughly 25bps NIM compression for banks, especially the PSUs, in 1QFY12.
Note that lending rate hikes in 1QFY12 were done mid-quarter and hence the
full impact will be felt only in 2QFY12. Loan growth is also expected to be
weak, on top of which we expect pressure on asset quality due to restructured
assets to continue for one more quarter, as the principal moratorium on some
restructured assets will continue to be there till June-2011. Also the deadline
for migration to online (CBS) method of classification of NPLs is extended till
Sep-2011 and hence more NPLs are likely to come out. To summarise,
1QFY12 results are expected to be bad for the sector and we don’t rule out
the possibility of negative surprises.
Outlook
�� Wait for 1QFY12 to buy banks: We believe 1QFY12 results for banks
especially for PSUs is expected to be bad, and we don’t think that the bad
numbers are fully priced in. Hence around July ’11 we believe there could be
a better entry point into the sector. Valuations are getting to look cheap now.
Hence from a 12-18m perspective we are fine accumulating on corrections.
The positive surprise on earnings could happen in second half – due to lower
credit costs and opex in our view. Our top picks are Union Bank of India and
PNB in the PSU space and amongst the privates we like ICICI Bank and
HDFC Bank.
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