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India: Financial Services
Equity Research
Rising rates to impact earnings, performance; remain selective
Stocks correct once again on concerns over margins, rate hikes
After appreciating 18%-25% from their troughs on Feb 10, 2011, Indian bank
stocks corrected once again by an average 10% since April 25. We attribute it
to: (1) concerns over impact of rate hike on rising inflation, (2) decline in 4Q
margins for banks such as Axis, BOB, BOI, (3) increase in savings rate to 4%
from 3.5% and potential deregulation by RBI. We have been recommending
selective buying since Sept 2010 on concerns over loan growth, NIM pressure
and NPLs. Post recent results, upward revision in interest rates by our GS
Global ECS Research team, and hike in savings deposit rate by RBI, we factor
in lower NII and earnings growth for FY2013E (when both the NIM and NPL
impact will be relatively large). We revise our FY11E-FY13E EPS by -10% to
+4%, introduce FY14E estimates, and lower our 12-m target prices by up to 9%.
Margins to compress on lower spreads, growth and CD ratio
NIMs for Indian banks have peaked, in our view. We factor in lower margins
for FY2012E (also impacted by hike in savings deposit rate), and are now doing
the same for FY2013E as stabilizing/falling rates in FY2013 would likely
exaggerate the impact. In the last falling rate cycle (FY08-FY10), PSU banks’
spreads compressed 50-90 bp, but in this cycle we assume lower 20-40 bp,
with risk on the downside. We retain our FY12E loan growth at 18%-20%.
NPLs will likely rise in FY2013
Slowdown in GDP, sales, EBITDA and PAT margins for corporate India will
likely lead to higher NPLs, in our view – we estimate 30-50 bp rises in
FY13E. However, credit costs may not move in line, even after considering
increased provisioning norms, as the RBI recently removed coverage
requirement of 70% on incremental NPLs. Thus, banks may make lower
provisions to offset lower revenue growth.
Valuations not inexpensive vs. macro risk
We think valuations could correct further on macro risk: with higher rates and
lower growth. In our view, private banks would likely be able to manage the
cycle far better than PSU peers, for which we see higher earnings risk. We
maintain our stance of selective stock picks among India financials and favor: (1)
IndusInd Bank (CL Buy) and Yes Bank (Buy) – margin pressure will be offset by
a higher CASA ratio, (2) ICICI Bank (Buy) – international book repricing to
support margin, (3) PNB and BOB (Buy)– reasonable valuations vs. RoE. We
maintain our Sell rating on BOI, SBI, and HDFC
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Financial Services
Equity Research
Rising rates to impact earnings, performance; remain selective
Stocks correct once again on concerns over margins, rate hikes
After appreciating 18%-25% from their troughs on Feb 10, 2011, Indian bank
stocks corrected once again by an average 10% since April 25. We attribute it
to: (1) concerns over impact of rate hike on rising inflation, (2) decline in 4Q
margins for banks such as Axis, BOB, BOI, (3) increase in savings rate to 4%
from 3.5% and potential deregulation by RBI. We have been recommending
selective buying since Sept 2010 on concerns over loan growth, NIM pressure
and NPLs. Post recent results, upward revision in interest rates by our GS
Global ECS Research team, and hike in savings deposit rate by RBI, we factor
in lower NII and earnings growth for FY2013E (when both the NIM and NPL
impact will be relatively large). We revise our FY11E-FY13E EPS by -10% to
+4%, introduce FY14E estimates, and lower our 12-m target prices by up to 9%.
Margins to compress on lower spreads, growth and CD ratio
NIMs for Indian banks have peaked, in our view. We factor in lower margins
for FY2012E (also impacted by hike in savings deposit rate), and are now doing
the same for FY2013E as stabilizing/falling rates in FY2013 would likely
exaggerate the impact. In the last falling rate cycle (FY08-FY10), PSU banks’
spreads compressed 50-90 bp, but in this cycle we assume lower 20-40 bp,
with risk on the downside. We retain our FY12E loan growth at 18%-20%.
NPLs will likely rise in FY2013
Slowdown in GDP, sales, EBITDA and PAT margins for corporate India will
likely lead to higher NPLs, in our view – we estimate 30-50 bp rises in
FY13E. However, credit costs may not move in line, even after considering
increased provisioning norms, as the RBI recently removed coverage
requirement of 70% on incremental NPLs. Thus, banks may make lower
provisions to offset lower revenue growth.
Valuations not inexpensive vs. macro risk
We think valuations could correct further on macro risk: with higher rates and
lower growth. In our view, private banks would likely be able to manage the
cycle far better than PSU peers, for which we see higher earnings risk. We
maintain our stance of selective stock picks among India financials and favor: (1)
IndusInd Bank (CL Buy) and Yes Bank (Buy) – margin pressure will be offset by
a higher CASA ratio, (2) ICICI Bank (Buy) – international book repricing to
support margin, (3) PNB and BOB (Buy)– reasonable valuations vs. RoE. We
maintain our Sell rating on BOI, SBI, and HDFC
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