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India Equity Research Reports, IPO and Stock News
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Lowering earnings and price targets
Bank stocks have corrected sharply following the credit policy, mixed 4Q earnings and
concerns of a likely slowdown in loan growth and increase in NPLs in response to rising
rates.
After the steep correction, we see downside support to bank valuations. However,
macro and regulatory newsflow will likely remain negative in 1H FY12, capping upside
to stock prices.
ICICI Bank, HDFC Bank, BoB and IndusInd Bank are our key picks. We expect Union
Bank to outperform other PSU banks due to its high earnings visibility. SBI, BoI and
PNB are likely to underperform other state banks. Axis Bank has corrected sharply but
incremental profitability remains under pressure, in our view.
Among NBFCs, LIC Housing is likely to outperform after the withdrawal of the risky
Advantage 5 loans. Regulatory uncertainty will continue to weigh on transport finance
companies in the short term till there is clarity in June 2011. Between M&M and
Shriram, we prefer Shriram at current valuations
Bank stocks have corrected sharply
The Bankex has declined 9% over the past month and 20% since its peak on 5 Nov ’11 following
the announcement of the credit policy, mixed 4Q earnings and concerns of slowdown in loan
growth and increase in NPLs in response to higher interest rates. The key disappointment in 4Q
FY11 earnings was higher-than-expected slippages for state banks except Union Bank. For
private banks, slippages were under control. Private bank earnings were better than expected
except for Axis Bank where NIMs were substantially lower than expected.
Lowering earnings and target prices
We lower our earnings for banks and finance companies following the announcement of the
credit policy and 4Q earnings.
What has changed: We build in somewhat lower NIMs, higher slippages and lower operating
expenses following the huge one time provision of pensions made by state banks other than SBI
in FY11. While we build in higher slippages, we still expect slippages in FY12 to be lower than in
FY11 as we believe slippages from restructured loans have peaked in FY11. Our NIMs for state
banks for FY12E are now lower by 41bps compared to 9M FY11. Our NIMs for private banks are
lower by 22bps over 9M FY11. Excluding Axis Bank, our NIMs are down by 11bps for private
banks.
We have revised our target P/BV multiples to factor in 1) higher credit risks for state banks, 2)
slower sustainable growth for all companies and 3) regulatory risks for transport finance
companies.
Stock calls
Top picks: ICICI Bank, HDFC Bank, IndusInd Bank and Bank of Baroda are our key picks in the
sector.
ICICI Bank: Revival in loan growth, stable yoy NIMs (at a time when NIMs for the rest of the
sector are likely to decline) and continued reduction in slippages and credit costs are likely to be
the key earnings drivers for ICICI Bank in FY12E.
HDFC Bank: We like HDFC Bank for its high visibility of earnings. Strong loan growth, sound
asset quality and cushion of excess provisions are likely to be the key earnings drivers for HDFC
Bank.
IndusInd Bank: Strong growth in loans, stable NIMs on the back of improving CASA and
contained credit cost are likely to be the key earnings drivers for IndusInd Bank.
BoB: We like BoB for its consistent earnings growth and lower-than-sector slippages. While
slippages are likely to rise yoy on a low base in FY12, they are likely to still remain lower than the
sector.
Axis Bank – Likely pressures on incremental profitability: We have an OUTPERFORM rating
on Axis Bank. The stock price has corrected sharply after its weak 4Q earnings. Axis Bank has a
sound balance sheet. However, we have built in pressures on incremental profitability as we are
concerned about Axis Bank’s concentrated exposures to infrastructure and SMEs which makes
its asset quality and loan growth more vulnerable to a rising rate environment.
We believe SBI, PNB and BoI are likely to underperform the market till they show
consistent delivery of earnings and improvement in asset quality.
Union Bank is likely to outperform other state banks due to high earnings visibility: We
have an IN-LINE rating on Union as valuations for Union are higher than for other mid-sized
banks and only at a slight discount to large state banks like PNB and BoB. However, we believe
earnings visibility for Union Bank is higher than that for other banks over the next 3-4 quarters. As
such we expect Union to outperform other state banks in the short term.
Shriram over M&M Finance: Among the NBFCs, we believe Shriram Transports and M&M
Finance are sound business models, however, the risk of negative regulation may weigh on stock
prices till June 2011. Shriram has corrected sharply and we prefer it to M&M Finance at current
levels.
LIC Housing is likely to outperform: We are upgrading LIC HF to OUTPERFORM as it has
withdrawn its risky, fixed rate ‘Advantage 5’ loans and replaced them with the profitable floating
rate ‘Freedom’ loans.
Earnings volatility in IDFC is likely to continue but valuations have also corrected steeply:
We see weakness in IDFC’s earnings over the next 2-3 quarters. However, the stock has also
corrected sharply, hence, we expect the stock to perform in line with the market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lowering earnings and price targets
Bank stocks have corrected sharply following the credit policy, mixed 4Q earnings and
concerns of a likely slowdown in loan growth and increase in NPLs in response to rising
rates.
After the steep correction, we see downside support to bank valuations. However,
macro and regulatory newsflow will likely remain negative in 1H FY12, capping upside
to stock prices.
ICICI Bank, HDFC Bank, BoB and IndusInd Bank are our key picks. We expect Union
Bank to outperform other PSU banks due to its high earnings visibility. SBI, BoI and
PNB are likely to underperform other state banks. Axis Bank has corrected sharply but
incremental profitability remains under pressure, in our view.
Among NBFCs, LIC Housing is likely to outperform after the withdrawal of the risky
Advantage 5 loans. Regulatory uncertainty will continue to weigh on transport finance
companies in the short term till there is clarity in June 2011. Between M&M and
Shriram, we prefer Shriram at current valuations
Bank stocks have corrected sharply
The Bankex has declined 9% over the past month and 20% since its peak on 5 Nov ’11 following
the announcement of the credit policy, mixed 4Q earnings and concerns of slowdown in loan
growth and increase in NPLs in response to higher interest rates. The key disappointment in 4Q
FY11 earnings was higher-than-expected slippages for state banks except Union Bank. For
private banks, slippages were under control. Private bank earnings were better than expected
except for Axis Bank where NIMs were substantially lower than expected.
Lowering earnings and target prices
We lower our earnings for banks and finance companies following the announcement of the
credit policy and 4Q earnings.
What has changed: We build in somewhat lower NIMs, higher slippages and lower operating
expenses following the huge one time provision of pensions made by state banks other than SBI
in FY11. While we build in higher slippages, we still expect slippages in FY12 to be lower than in
FY11 as we believe slippages from restructured loans have peaked in FY11. Our NIMs for state
banks for FY12E are now lower by 41bps compared to 9M FY11. Our NIMs for private banks are
lower by 22bps over 9M FY11. Excluding Axis Bank, our NIMs are down by 11bps for private
banks.
We have revised our target P/BV multiples to factor in 1) higher credit risks for state banks, 2)
slower sustainable growth for all companies and 3) regulatory risks for transport finance
companies.
Stock calls
Top picks: ICICI Bank, HDFC Bank, IndusInd Bank and Bank of Baroda are our key picks in the
sector.
ICICI Bank: Revival in loan growth, stable yoy NIMs (at a time when NIMs for the rest of the
sector are likely to decline) and continued reduction in slippages and credit costs are likely to be
the key earnings drivers for ICICI Bank in FY12E.
HDFC Bank: We like HDFC Bank for its high visibility of earnings. Strong loan growth, sound
asset quality and cushion of excess provisions are likely to be the key earnings drivers for HDFC
Bank.
IndusInd Bank: Strong growth in loans, stable NIMs on the back of improving CASA and
contained credit cost are likely to be the key earnings drivers for IndusInd Bank.
BoB: We like BoB for its consistent earnings growth and lower-than-sector slippages. While
slippages are likely to rise yoy on a low base in FY12, they are likely to still remain lower than the
sector.
Axis Bank – Likely pressures on incremental profitability: We have an OUTPERFORM rating
on Axis Bank. The stock price has corrected sharply after its weak 4Q earnings. Axis Bank has a
sound balance sheet. However, we have built in pressures on incremental profitability as we are
concerned about Axis Bank’s concentrated exposures to infrastructure and SMEs which makes
its asset quality and loan growth more vulnerable to a rising rate environment.
We believe SBI, PNB and BoI are likely to underperform the market till they show
consistent delivery of earnings and improvement in asset quality.
Union Bank is likely to outperform other state banks due to high earnings visibility: We
have an IN-LINE rating on Union as valuations for Union are higher than for other mid-sized
banks and only at a slight discount to large state banks like PNB and BoB. However, we believe
earnings visibility for Union Bank is higher than that for other banks over the next 3-4 quarters. As
such we expect Union to outperform other state banks in the short term.
Shriram over M&M Finance: Among the NBFCs, we believe Shriram Transports and M&M
Finance are sound business models, however, the risk of negative regulation may weigh on stock
prices till June 2011. Shriram has corrected sharply and we prefer it to M&M Finance at current
levels.
LIC Housing is likely to outperform: We are upgrading LIC HF to OUTPERFORM as it has
withdrawn its risky, fixed rate ‘Advantage 5’ loans and replaced them with the profitable floating
rate ‘Freedom’ loans.
Earnings volatility in IDFC is likely to continue but valuations have also corrected steeply:
We see weakness in IDFC’s earnings over the next 2-3 quarters. However, the stock has also
corrected sharply, hence, we expect the stock to perform in line with the market.
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