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Banking monthly
What’s inside?
Key takeaways- management interaction and interviews
Round-up on news flows- regulatory and company-specific
Banking sector round-up- Credit growth, interest rates and liquidity
Update on insurance and mutual funds– Flow and market-share
Valuation– Price performance, comparative matrix, P/B band charts
Take a look!, ‘Banking Calendar’, links to our recent reports
Takeaways-management meeting and interviews
Our recent interactions with banks indicate that loan growth has moderated due
to (1) fall in credit demand, (2) some risk-averseness among banks and (3) focus
on margins that is forcing banks to distance from low-yielding loans. However,
there is an interesting disconnect in the loan growth trend of the sector and banks
that have reported 1QFY12 results. While sector’s loan growth has moderated by
just 100bps between March-June, most banks that reported 1Q results so far have
shown much stronger moderation. This may indicate that some banks that are yet
to report 1Q result, may see uptick in growth. Banks’ intent to defend margins,
even at cost of moderation in loan growth, is evident from recent hikes in lending
rates, by ~25bps; deposit rates have been rather stable- inline with trends 3rd
phase of cycle highlighted in our recent note (click to download report).
Sector round-up– Bounce back
Over past month, banking stocks (up 4%) have marginally outperformed Sensex
(up 3%) and among banks SBI and PNB have significantly outperformed regaining
from the correction in the past few months. Valuations of most banks are close to
average for the past five years and this should provide support to stock prices.
During 1QFY12, we expect Indian banks to report just 6% YoY growth in profit,
but ex-SBI profit growth would be higher at 17%. While the core profit (PPP ex
treasury) should see a healthy 20% growth, lower treasury gains and rise in NPL
provisions will suppress profit growth.
Update on insurance and mutual funds- May-11/ Jun-11
During May-11, annualised NBP of sector fell by 16% YoY (compared to 3%
decline in Apr-11), primarily due to 47% YoY fall in NBP of private sector whereas
LIC reported growth by 7% YoY. In Jun-11, AUMs of mutual funds fell by 8% MoM
to Rs6.7tn (up 7% YoY). Banks have nearly halved their investment in mutual
funds to Rs540bn (~8% of total AUM).
Regulatory and sector newsflows
The government has released the draft of a new bill to govern microfinance institutions
that will put them outside the purview of state-level legislation.
RBI has asked banks to offer more services through the no-frill accounts.
RBI has extended the time limit for corporate groups to buy-back foreign currency
convertible bonds (FCCB) up to March 31, 2012.
RBI has permitted Indian companies to take fresh external loans and issue new FCCB
to refinance existing FCCB.
As per the new bank branch authorisation policy, banks will be required to open 25% of
new branches in Tier 5 and 6 areas.
Banks may seek RBI’s permission to restructure loans given to developers as well as
home buyers in Noida Extension
Company newsflows
SBI may, reportedly, examine options like private institutional placements and a FPO,
if the government does not subscribe to its rights issue fully.
Government has approved merger of State Bank of India Commercial and International
Bank Ltd (SBICI) with its parent bank SBI.
RBI has asked Axis Bank to revise the deal structure and accounting scheme for its
proposed acquisition of Enam Securities’ equities and investment banking business.
Indian Bank plans to raise c.US$350m through a flow-on public offer (FPO).
PFC plans to raise over Rs220bn through infrastructure and tax-free bond issues in
FY12 to fund its borrowing requirements.
PFC is in discussion with NPCIL for lending Rs120bn to set up two atomic plants in
Gujarat and Rajasthan with a total capacity of 2,800 MW.
Air India has reportedly demanded an equity infusion of Rs66bn in FY12. The infusion
is one of the preconditions set by its bankers to execute the restructuring plan.
GTL Ltd is likely to seek a corporate debt restructuring of Rs20bn.
HDFC Bank has launched 'Infinia' cards for the high net worth community in India.
Reliance Capital, which recently agreed to sell 26% in Reliance Life Insurance to
Nippon Life, is reportedly in talks with domestic lenders to divest a further 23% stake.
PNB is awaiting approval from Canadian central bank to launch banking operations.
ICICI Bank plans to add 1,500 new branches in the next three years that will take the
total branch network to 4,000.
L&T Finance Holdings will launch its IPO on July 27 whereby it expects to mobilise
Rs12.5bn through dilution of up to 17% of its stake.
Dhanlaxmi Bank has postponed its plans to raise Rs2.9bn through issue of new
shares as one of the investors could not receive regulatory approval.
ING Vysya Bank has raised Rs9.7bn from institutional investors and Netherlandsbased
promoter ING Group NV.
Shriram Transport Finance non-convertible debentures issue of Rs5bn (with a
green-shoe option of Rs5bn) was subscribed by over five times. The coupon rate was
11.3-11.6% depending upon the tenure.
Interesting interviews
Mr. Piyush Gupta (CEO, DBS Group Holdings) (click here for full article):
Our business in India is actually going gangbuster. It's today the third largest business of
our group, and somewhere between 7-8% of our total group profits, which is very good. The
way the Indian regulations work is everytime you open a branch in the metro, you are
required to open a branch in a suburban area. And so we have opened half a dozen
branches in places like Surat, Moradabad, Kolhapur and Cuddalore which are fairly small
areas and we have a footprint over there. But it's not at this stage that we're going into
rural and start doing agricultural banking.
Mr. Pratip Chaudhuri (Chairman, SBI) (click here for full article):
Due to inflationary pressures and high interest rates, we have kept a loan growth target in
the range of 16% to 19% as against 18-21% projected earlier. There is also still some pain
left as far as non-performing assets are concerned in areas like agriculture and the
corporate sector. But our deposits have been growing steadily as our deposit rates are
higher than other instruments like post office deposits. We are focusing on retail deposits
that have helped us improve our net interest margins to 3.5% from 3.35% last fiscal. We
will continue to focus upon lending to the corporate sector.
Mr. MD Mallya (CMD, Bank of Baroda) (click here for full article):
Our thrust this fiscal will be on the efficient pricing of deposits and loans, higher CASA
(current and savings accounts) mobilisation and lower dependence on bulk deposits to
ensure better margins. We would endeavour to attain a well-balanced growth in its loan
book across different sectors like retail, SMEs, agriculture, wholesale and across different
geographies, including overseas markets
Mr. R Sridhar (MD, Shriram Transport Finance) (click here for full article):
The government has classified priority sectors due to the lack of credit flow. The objective is
to channelise bank credit to such credit-starved segments. Earlier, if a bank gave loan,
either directly or indirectly through NBFC to small truck operators, it was classified as
priority sector lending (PSL). For NBFCs like us, who generated almost 100% PSL assets of
small road transporters, the policy gave an advantage in raising resources since its
introduction.
Industry Interactions
Axis Bank (AXSB IN– Rs1,297– BUY)
1. Macro and loan growth
a. Even adjusting for the seasonal effect of 1Q there is a slow down in credit
demand as RBI tightening is now starting to flow through.
b. New capacity creation has slowed.
c. Credit growth for the sector estimated to be 18-19%
d. Loan growth mostly coming from working capital and retail segments.
2. Margins
a. Margins have contracted on back of higher cost of term deposits and rise
in savings deposit rates.
b. Increase in lending rates, run-off of priority sector loans may be margin
accretive in the next quarter.
3. Fees
a. Fee income from corporate (including debt syndication) was up 81% YoY;
retail fees up ~40% YoY led by a sharp growth in distribution from third
party products.
b. Corporate fee was strong because of some large debt syndication deals; in
the longer-term growth should stabilise.
c. Retail fees – YoY is looking high as fee growth in 1QFY11 was very weak
and hence the base is in favour; Axis MF also contributed.
4. Asset quality and provisions
a. Gross slippage will be stable, but upgrades could moderate.
b. QoQ growth in restructured loans from few large accounts.
c. Bank reversed some provision on standard assets- largely due to QoQ
contraction in loans.
5. Other issues
a. CASA growth has been stable despite the rising gap between term
deposits and savings rate.
b. Off balance sheet exposures have grown 19% QoQ.
c. Bank is increasing focus on raising retail term deposits.
d. Employee addition (5,500 employees) plus wage inflation has contributed
to the rise in staff costs.
e. Power is 6% of funded exposure and 9-10% of total exposures (similar to
March).
HDFC Ltd (HDFC IN– Rs706 – BUY)
1. In the recent months, demand in metros has slowed, but trends in the smaller
towns continue to remain strong.
2. Among metros, Mumbai has slowed materially whereas demand in Delhi
(NCR) and Chennai is strong.
3. Over past few months competitive intensity in the sector has eased, especially
since SBI has raised rates.
4. Last year HDFC’s mortgage rates were about 25-50bps higher than SBI’s, but
now their rates are very close/ or SBI’s rate is at slight premium.
5. As a result, HDFC’s loan growth of 22% has been faster than banking sector’s
growth of 17%.
6. Also in 1QFY12, HDFC had not securitised loans to HDFC Bank.
7. The growth in fee income was also strong at 145% due to a combination of
(1) low base and (2) better pricing environment that allowed HDFC to charge
higher fees from corporate and retail clients.
HDFC Bank (HDFCB IN– Rs501 – BUY)
1. Loan growth adjusted for short-term wholesale lending in last year was strong
at 29% YoY – reported growth was 20%.
2. While even current loan-book includes some short-term loans, bank has not
bought-back mortgage loans from HDFC.
3. While demand for auto loans seems to be slowing, mortgage lending is
buoyant.
4. Growth in some unsecured segments has also picked-up, from a low base, as
bank is becoming comfortable with quality of these loans.
5. Asset quality was generally stable in 1Q, but fresh slippages include some bit
from exposure to micro finance institutions (MFI).
6. Against the slippage in MFI loans, bank has utilised reserves created from
contingent provisions in the past few quarters.
7. This could be some more slippage in the coming quarters, but bank is carrying
enough provisions against these exposures.
Yes Bank (YES IN – Rs329 – BUY)
1. While loan growth moderated in 1QFY12, bank continues to target 30-35%
Cagr in loans.
2. During 1Q, bank was also focussing on de-bulking and de-risking the balance
sheet.
3. As part of the de-bulking exercise, bank has reduced exposure to clients
where either yields were low or cross sell rates were low.
4. Bank has also reduced concentration of exposures in order to lower risks.
5. Bank plans to add 40-50 branches per quarter and will expand the head count
to over 5,000 by Mar-12. Recently, bank hired some senior officials from
competing banks.
6. During the quarter, bank recovered from NPL accounts and also reversed the
provision against these accounts- this improved the NPL ratios.
7. Outlook on interest rates
a. Policy rates: Some last mile action by RBI still to go, but further increase
in policy rates may impact investment cycle.
b. Market rates- Longer and medium term rates are near peak, but shortterm
rates will be closely correlated to monetary policy.
Union Bank (UNBK IN – Rs309 – O-PF)
1. Loan growth has moderated to 17% due to (1) moderation in demand for
new loans (2) selective lending by the bank.
2. Bank is focussed on sustaining margins as well as lending to projects /
corporate groups with lower risk.
3. CASA growth has moderated to 12% YoY partly due to conversion of CASA
deposits into term deposits upon increase in interest rates.
4. Management has lowered target of credit growth for FY12 to 19% (from 22%
previously) and expects to see some improvement in margins.
5. Bank’s fresh slippages rose sharply QoQ in 1QFY12, but this was partly offset
by higher recoveries / upgrades.
6. Slippages could be higher in 2Q also as the bank migrates NPL recognition to
fully automated systems- as of now only agricultural loans are pending and
this will be completed by Sep-11.
7. NPL provisioning includes Rs2.14bn towards one-time provisions towards
RBI’s new norms for NPLs (Rs1.9bn) and restructured loans (Rs0.3bn).
8. While the reported profit was down 23% YoY, ex of these provisions the profit
would have been up 13% YoY.
9. Loan to infrastructure is approximately Rs200bn (14% of loans) of which
nearly Rs120bn is to the private sector.
10. Lending to power sector is Rs130bn (9% of loans). Large part of the loan to
SEBs is covered with government guarantees and letter of comfort from the
government.
11. Management also expects to receive some capital from government in FY12.
Magma Fincorp (MGMA IN– Rs75 – No Rec)
1. Magma focuses on providing finance in rural and semi-urban areas.
2. It has 172 branches in 21 states / union territories that cover over 2,000
business clusters. 80% of branches are located in rural and semi urban
areas.
3. Company is currently focussed on providing finance in segments like
construction equipment, commercial vehicle, cars and utility vehicles.
4. It has recently forayed into providing finance to SMEs and tractors.
5. Since RBI disallowed priority sector status to banks’ loans to NBFCs for
onlending to eligible sectors, Magma is facing increase in cost of funds.
6. However, demand appears strong and it plans to leverage on a strong
balance sheet (tier I ratio 16%) to drive 30-50% growth in lending.
7. As on Mar-11, Magma’s AUM were Rs109bn and it reported ROA of 2.3% and
ROE of 24%.
Insurance sector– Degrowth continues
During May-11, annualised NBP of sector fell by 16% YoY (compared to
3% decline in Apr-11), primarily due to 47% YoY decline in NBP of
private sector whereas LIC reported growth by 7% YoY. The market
share of LIC in new business premiums was at 74% in Apr-11. Most of
the leading private insurers reported YoY fall in NBP- similar to trends
last month. With NBP declining due to changes in regulatory framework,
it will now be important for insurance companies to improve conservation
ratio and lower the operating costs.
Sector NBP declines; LIC reports growth
In May-11, NBP for the sector declined by 16% YoY, driven by 47% decline in NBP
of private sector.
On the other hand, LIC grew ahead of the sector and reported 7% YoY growth in
NBP that expanded its market share to 74%.
Higher share of traditional insurance policies has been the key driver of LIC’s
market share gains while the private insurers witnessed drop in sale of Ulips.
Premiums of private insurers nearly half YoY
During May-11, most of the leading private insurers reported decline in NBP. This is
the second straight month when most private insurers have reported a decline.
MNYL and Tata AIG reported the lowest decline in premiums at ~25%.
SBI Life reported the highest decline in NBP at 70%, the volatility in sales is partly
due to higher share of group business.
HDFC Life reported a 34% decline and ICICI’s premiums declined by 55% YoY.
Other leading players that reported declined were Reliance Life (59%), Bajaj (44%)
and Birla (43%).
Conservation ratio and cost control will be critical
With NBP being low due to changes in regulations, it will now be important for
insurance companies to improve conservation ratio and lower the operating costs.
Among large players, SBI, Birla, Reliance and ICICI had conservation ratio lower
than the sector average of 68%; LIC, MNYL and Tata fare better.
On the cost front, we believe that LIC, ICICI and SBI are better placed with very
low cost ratio of 1-5% of AUM. However, MNYL, Reliance and most of the smaller
players and new entrants have a high operating cost base.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banking monthly
What’s inside?
Key takeaways- management interaction and interviews
Round-up on news flows- regulatory and company-specific
Banking sector round-up- Credit growth, interest rates and liquidity
Update on insurance and mutual funds– Flow and market-share
Valuation– Price performance, comparative matrix, P/B band charts
Take a look!, ‘Banking Calendar’, links to our recent reports
Takeaways-management meeting and interviews
Our recent interactions with banks indicate that loan growth has moderated due
to (1) fall in credit demand, (2) some risk-averseness among banks and (3) focus
on margins that is forcing banks to distance from low-yielding loans. However,
there is an interesting disconnect in the loan growth trend of the sector and banks
that have reported 1QFY12 results. While sector’s loan growth has moderated by
just 100bps between March-June, most banks that reported 1Q results so far have
shown much stronger moderation. This may indicate that some banks that are yet
to report 1Q result, may see uptick in growth. Banks’ intent to defend margins,
even at cost of moderation in loan growth, is evident from recent hikes in lending
rates, by ~25bps; deposit rates have been rather stable- inline with trends 3rd
phase of cycle highlighted in our recent note (click to download report).
Sector round-up– Bounce back
Over past month, banking stocks (up 4%) have marginally outperformed Sensex
(up 3%) and among banks SBI and PNB have significantly outperformed regaining
from the correction in the past few months. Valuations of most banks are close to
average for the past five years and this should provide support to stock prices.
During 1QFY12, we expect Indian banks to report just 6% YoY growth in profit,
but ex-SBI profit growth would be higher at 17%. While the core profit (PPP ex
treasury) should see a healthy 20% growth, lower treasury gains and rise in NPL
provisions will suppress profit growth.
Update on insurance and mutual funds- May-11/ Jun-11
During May-11, annualised NBP of sector fell by 16% YoY (compared to 3%
decline in Apr-11), primarily due to 47% YoY fall in NBP of private sector whereas
LIC reported growth by 7% YoY. In Jun-11, AUMs of mutual funds fell by 8% MoM
to Rs6.7tn (up 7% YoY). Banks have nearly halved their investment in mutual
funds to Rs540bn (~8% of total AUM).
Regulatory and sector newsflows
The government has released the draft of a new bill to govern microfinance institutions
that will put them outside the purview of state-level legislation.
RBI has asked banks to offer more services through the no-frill accounts.
RBI has extended the time limit for corporate groups to buy-back foreign currency
convertible bonds (FCCB) up to March 31, 2012.
RBI has permitted Indian companies to take fresh external loans and issue new FCCB
to refinance existing FCCB.
As per the new bank branch authorisation policy, banks will be required to open 25% of
new branches in Tier 5 and 6 areas.
Banks may seek RBI’s permission to restructure loans given to developers as well as
home buyers in Noida Extension
Company newsflows
SBI may, reportedly, examine options like private institutional placements and a FPO,
if the government does not subscribe to its rights issue fully.
Government has approved merger of State Bank of India Commercial and International
Bank Ltd (SBICI) with its parent bank SBI.
RBI has asked Axis Bank to revise the deal structure and accounting scheme for its
proposed acquisition of Enam Securities’ equities and investment banking business.
Indian Bank plans to raise c.US$350m through a flow-on public offer (FPO).
PFC plans to raise over Rs220bn through infrastructure and tax-free bond issues in
FY12 to fund its borrowing requirements.
PFC is in discussion with NPCIL for lending Rs120bn to set up two atomic plants in
Gujarat and Rajasthan with a total capacity of 2,800 MW.
Air India has reportedly demanded an equity infusion of Rs66bn in FY12. The infusion
is one of the preconditions set by its bankers to execute the restructuring plan.
GTL Ltd is likely to seek a corporate debt restructuring of Rs20bn.
HDFC Bank has launched 'Infinia' cards for the high net worth community in India.
Reliance Capital, which recently agreed to sell 26% in Reliance Life Insurance to
Nippon Life, is reportedly in talks with domestic lenders to divest a further 23% stake.
PNB is awaiting approval from Canadian central bank to launch banking operations.
ICICI Bank plans to add 1,500 new branches in the next three years that will take the
total branch network to 4,000.
L&T Finance Holdings will launch its IPO on July 27 whereby it expects to mobilise
Rs12.5bn through dilution of up to 17% of its stake.
Dhanlaxmi Bank has postponed its plans to raise Rs2.9bn through issue of new
shares as one of the investors could not receive regulatory approval.
ING Vysya Bank has raised Rs9.7bn from institutional investors and Netherlandsbased
promoter ING Group NV.
Shriram Transport Finance non-convertible debentures issue of Rs5bn (with a
green-shoe option of Rs5bn) was subscribed by over five times. The coupon rate was
11.3-11.6% depending upon the tenure.
Interesting interviews
Mr. Piyush Gupta (CEO, DBS Group Holdings) (click here for full article):
Our business in India is actually going gangbuster. It's today the third largest business of
our group, and somewhere between 7-8% of our total group profits, which is very good. The
way the Indian regulations work is everytime you open a branch in the metro, you are
required to open a branch in a suburban area. And so we have opened half a dozen
branches in places like Surat, Moradabad, Kolhapur and Cuddalore which are fairly small
areas and we have a footprint over there. But it's not at this stage that we're going into
rural and start doing agricultural banking.
Mr. Pratip Chaudhuri (Chairman, SBI) (click here for full article):
Due to inflationary pressures and high interest rates, we have kept a loan growth target in
the range of 16% to 19% as against 18-21% projected earlier. There is also still some pain
left as far as non-performing assets are concerned in areas like agriculture and the
corporate sector. But our deposits have been growing steadily as our deposit rates are
higher than other instruments like post office deposits. We are focusing on retail deposits
that have helped us improve our net interest margins to 3.5% from 3.35% last fiscal. We
will continue to focus upon lending to the corporate sector.
Mr. MD Mallya (CMD, Bank of Baroda) (click here for full article):
Our thrust this fiscal will be on the efficient pricing of deposits and loans, higher CASA
(current and savings accounts) mobilisation and lower dependence on bulk deposits to
ensure better margins. We would endeavour to attain a well-balanced growth in its loan
book across different sectors like retail, SMEs, agriculture, wholesale and across different
geographies, including overseas markets
Mr. R Sridhar (MD, Shriram Transport Finance) (click here for full article):
The government has classified priority sectors due to the lack of credit flow. The objective is
to channelise bank credit to such credit-starved segments. Earlier, if a bank gave loan,
either directly or indirectly through NBFC to small truck operators, it was classified as
priority sector lending (PSL). For NBFCs like us, who generated almost 100% PSL assets of
small road transporters, the policy gave an advantage in raising resources since its
introduction.
Industry Interactions
Axis Bank (AXSB IN– Rs1,297– BUY)
1. Macro and loan growth
a. Even adjusting for the seasonal effect of 1Q there is a slow down in credit
demand as RBI tightening is now starting to flow through.
b. New capacity creation has slowed.
c. Credit growth for the sector estimated to be 18-19%
d. Loan growth mostly coming from working capital and retail segments.
2. Margins
a. Margins have contracted on back of higher cost of term deposits and rise
in savings deposit rates.
b. Increase in lending rates, run-off of priority sector loans may be margin
accretive in the next quarter.
3. Fees
a. Fee income from corporate (including debt syndication) was up 81% YoY;
retail fees up ~40% YoY led by a sharp growth in distribution from third
party products.
b. Corporate fee was strong because of some large debt syndication deals; in
the longer-term growth should stabilise.
c. Retail fees – YoY is looking high as fee growth in 1QFY11 was very weak
and hence the base is in favour; Axis MF also contributed.
4. Asset quality and provisions
a. Gross slippage will be stable, but upgrades could moderate.
b. QoQ growth in restructured loans from few large accounts.
c. Bank reversed some provision on standard assets- largely due to QoQ
contraction in loans.
5. Other issues
a. CASA growth has been stable despite the rising gap between term
deposits and savings rate.
b. Off balance sheet exposures have grown 19% QoQ.
c. Bank is increasing focus on raising retail term deposits.
d. Employee addition (5,500 employees) plus wage inflation has contributed
to the rise in staff costs.
e. Power is 6% of funded exposure and 9-10% of total exposures (similar to
March).
HDFC Ltd (HDFC IN– Rs706 – BUY)
1. In the recent months, demand in metros has slowed, but trends in the smaller
towns continue to remain strong.
2. Among metros, Mumbai has slowed materially whereas demand in Delhi
(NCR) and Chennai is strong.
3. Over past few months competitive intensity in the sector has eased, especially
since SBI has raised rates.
4. Last year HDFC’s mortgage rates were about 25-50bps higher than SBI’s, but
now their rates are very close/ or SBI’s rate is at slight premium.
5. As a result, HDFC’s loan growth of 22% has been faster than banking sector’s
growth of 17%.
6. Also in 1QFY12, HDFC had not securitised loans to HDFC Bank.
7. The growth in fee income was also strong at 145% due to a combination of
(1) low base and (2) better pricing environment that allowed HDFC to charge
higher fees from corporate and retail clients.
HDFC Bank (HDFCB IN– Rs501 – BUY)
1. Loan growth adjusted for short-term wholesale lending in last year was strong
at 29% YoY – reported growth was 20%.
2. While even current loan-book includes some short-term loans, bank has not
bought-back mortgage loans from HDFC.
3. While demand for auto loans seems to be slowing, mortgage lending is
buoyant.
4. Growth in some unsecured segments has also picked-up, from a low base, as
bank is becoming comfortable with quality of these loans.
5. Asset quality was generally stable in 1Q, but fresh slippages include some bit
from exposure to micro finance institutions (MFI).
6. Against the slippage in MFI loans, bank has utilised reserves created from
contingent provisions in the past few quarters.
7. This could be some more slippage in the coming quarters, but bank is carrying
enough provisions against these exposures.
Yes Bank (YES IN – Rs329 – BUY)
1. While loan growth moderated in 1QFY12, bank continues to target 30-35%
Cagr in loans.
2. During 1Q, bank was also focussing on de-bulking and de-risking the balance
sheet.
3. As part of the de-bulking exercise, bank has reduced exposure to clients
where either yields were low or cross sell rates were low.
4. Bank has also reduced concentration of exposures in order to lower risks.
5. Bank plans to add 40-50 branches per quarter and will expand the head count
to over 5,000 by Mar-12. Recently, bank hired some senior officials from
competing banks.
6. During the quarter, bank recovered from NPL accounts and also reversed the
provision against these accounts- this improved the NPL ratios.
7. Outlook on interest rates
a. Policy rates: Some last mile action by RBI still to go, but further increase
in policy rates may impact investment cycle.
b. Market rates- Longer and medium term rates are near peak, but shortterm
rates will be closely correlated to monetary policy.
Union Bank (UNBK IN – Rs309 – O-PF)
1. Loan growth has moderated to 17% due to (1) moderation in demand for
new loans (2) selective lending by the bank.
2. Bank is focussed on sustaining margins as well as lending to projects /
corporate groups with lower risk.
3. CASA growth has moderated to 12% YoY partly due to conversion of CASA
deposits into term deposits upon increase in interest rates.
4. Management has lowered target of credit growth for FY12 to 19% (from 22%
previously) and expects to see some improvement in margins.
5. Bank’s fresh slippages rose sharply QoQ in 1QFY12, but this was partly offset
by higher recoveries / upgrades.
6. Slippages could be higher in 2Q also as the bank migrates NPL recognition to
fully automated systems- as of now only agricultural loans are pending and
this will be completed by Sep-11.
7. NPL provisioning includes Rs2.14bn towards one-time provisions towards
RBI’s new norms for NPLs (Rs1.9bn) and restructured loans (Rs0.3bn).
8. While the reported profit was down 23% YoY, ex of these provisions the profit
would have been up 13% YoY.
9. Loan to infrastructure is approximately Rs200bn (14% of loans) of which
nearly Rs120bn is to the private sector.
10. Lending to power sector is Rs130bn (9% of loans). Large part of the loan to
SEBs is covered with government guarantees and letter of comfort from the
government.
11. Management also expects to receive some capital from government in FY12.
Magma Fincorp (MGMA IN– Rs75 – No Rec)
1. Magma focuses on providing finance in rural and semi-urban areas.
2. It has 172 branches in 21 states / union territories that cover over 2,000
business clusters. 80% of branches are located in rural and semi urban
areas.
3. Company is currently focussed on providing finance in segments like
construction equipment, commercial vehicle, cars and utility vehicles.
4. It has recently forayed into providing finance to SMEs and tractors.
5. Since RBI disallowed priority sector status to banks’ loans to NBFCs for
onlending to eligible sectors, Magma is facing increase in cost of funds.
6. However, demand appears strong and it plans to leverage on a strong
balance sheet (tier I ratio 16%) to drive 30-50% growth in lending.
7. As on Mar-11, Magma’s AUM were Rs109bn and it reported ROA of 2.3% and
ROE of 24%.
Insurance sector– Degrowth continues
During May-11, annualised NBP of sector fell by 16% YoY (compared to
3% decline in Apr-11), primarily due to 47% YoY decline in NBP of
private sector whereas LIC reported growth by 7% YoY. The market
share of LIC in new business premiums was at 74% in Apr-11. Most of
the leading private insurers reported YoY fall in NBP- similar to trends
last month. With NBP declining due to changes in regulatory framework,
it will now be important for insurance companies to improve conservation
ratio and lower the operating costs.
Sector NBP declines; LIC reports growth
In May-11, NBP for the sector declined by 16% YoY, driven by 47% decline in NBP
of private sector.
On the other hand, LIC grew ahead of the sector and reported 7% YoY growth in
NBP that expanded its market share to 74%.
Higher share of traditional insurance policies has been the key driver of LIC’s
market share gains while the private insurers witnessed drop in sale of Ulips.
Premiums of private insurers nearly half YoY
During May-11, most of the leading private insurers reported decline in NBP. This is
the second straight month when most private insurers have reported a decline.
MNYL and Tata AIG reported the lowest decline in premiums at ~25%.
SBI Life reported the highest decline in NBP at 70%, the volatility in sales is partly
due to higher share of group business.
HDFC Life reported a 34% decline and ICICI’s premiums declined by 55% YoY.
Other leading players that reported declined were Reliance Life (59%), Bajaj (44%)
and Birla (43%).
Conservation ratio and cost control will be critical
With NBP being low due to changes in regulations, it will now be important for
insurance companies to improve conservation ratio and lower the operating costs.
Among large players, SBI, Birla, Reliance and ICICI had conservation ratio lower
than the sector average of 68%; LIC, MNYL and Tata fare better.
On the cost front, we believe that LIC, ICICI and SBI are better placed with very
low cost ratio of 1-5% of AUM. However, MNYL, Reliance and most of the smaller
players and new entrants have a high operating cost base.
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