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Banks-Retail
1QFY12 Earnings: mixed-bag,
but priced-in
�� 1Q12 earnings: mixed-bag; most Govt. banks on weak foot
Earnings growth to be a mixed-bag for banks, with private banks (barring Axis Bk)
leading the pack at +30%. Most govt. banks may show a decline in earnings,
owing to higher regulatory provisions / normalized credit costs and possible MTM
hits. But we believe this is likely to be the worst quarter for banks. Operating
earnings for most should grow +10-12% yoy. Govt. banks’ earnings to be driven
by top-line growth of +15-16% yoy, led by volume growth of +20-22% yoy, but
margins could decline by 15-25bps. SBI likely to show 30% decline. A few govt.
banks, like PNB, BOB and Indian Bk, could show +8-12% growth.
+30% earnings growth for ICICI, HDFC Bk, Yes Bk and Fed Bk
ICICI Bk and HDFC Bk to stand out with +30-35% earnings growth, driven by +21-
22% top-line growth as margins hold up yoy for both. Axis Bk may disappoint
(+24-25% yoy growth), owing to margin pressure (+20-25bps yoy decline) and a
higher-than-estimated hit on the corporate bond book owing to rise in bond yields.
Amongst smaller names, Yes Bk and Federal Bk likely to report +30% yoy growth.
Top-line growth in mid-teens, as margins under pressure
We estimate govt. banks to report top-line (NII) growth of +15-16%. This is driven
by +21% loan growth and a +15-25bps decline in margins yoy, led by 1) lower
incremental LDRs (<45-50%); 2) Higher PSL (low-yielding); 3) impact of savings
rate increase by 50bps and; 4) rise in funding costs (ahead of lending rate hikes).
ICICI Bk and HDFC Bk stand out with +21-22% yoy top-line growth.
NPLs: ‘key to watch’; credit cost high; MTM (bonds) for few
NPL slippages likely to remain elevated in 1QFY12, partly due to the residual
impact of online NPL recognition (~15-25% of loans not yet covered for most govt.
banks). Credit costs to also be higher yoy, on RBI’s new provisioning norms (on
restructured loans and NPL aging). ICICI Bk and HDFC Bk to still have best asset
quality (though may also see qoq NPL rise). MTM losses on bonds to be minimal.
SBI (~Rs6bn) in the large banks and OBC, BOI and Corp. Bk may be hit the most.
NBFCs: volume growth strong, but margins under pressure
We expect most NBFCs to show +20-25% yoy volume growth. But margins may
be down +20-30bps on a rise in costs. HDFC Ltd. likely to maintain 2.3% spread,
but LIC Hsg. and STFC may see a margin decline of +20-40bps qoq.
1Q earnings weakness priced-in; prefer quality (IBN & HDB)
Bank stocks have corrected by 5-15% in the past quarter on expectations of rising
rates, slowing growth / weak margins and asset quality pangs. We, however,
believe most of this is priced in and likely to be captured in 1QFY12 earnings. We
continue to prefer quality banks (with high CASA) such as ICICI Bk and HDFC Bk,
and in the govt. banks, we like SBI and PNB. We like STFC in the NBFC space,
owing to unique business model, skills sets and return ratios.
1QFY12 Earnings summary
We highlight our view on key bank / NBFCs earnings estimate for 1QFY12:
ICICI Bank: Top-line growth estimated at +22% yoy, driven by 20% yoy volume
growth, but we estimate a margin decline of +15-20bps, to 2.5%, driven by 1) full
effect of PSL lending and 2) full effect of increase in term deposit costs. We
expect NPL slippages of ~Rs2.5bn of MFI (buy out portfolio), but credit costs to
be down +40% yoy to Rs4.5bn.
HDFC Bank likely to show +30% yoy net profit growth, driven by +22% yoy topline
growth. Margins to be down +10bps yoy, but maintained qoq. We expect
operating earnings to grow 15% yoy. Asset quality is likely to hold up, but we
could see some rise qoq, partly owing to MFI-related NPLs rising post
restructuring of MFI exposure during the quarter.
Axis Bank to show net profit growth of +25% yoy, a shift from usual ~30% yoy.
The weak profitability will likely be driven by top-line growth of only 17% yoy, as
we estimate margins to decline +25bps yoy, to +3.4-3.5%. Moreover, while
provisions will be down +20% yoy, will remain at elevated levels as we expect
corporate bond book to take in some MTM hits owing to rise in bond yields.
SBI: Top line to grow +17-18% yoy, driven by +17-18% volume growth and
margins flat yoy (3.2%), but core margins likely to improve qoq (4QFY11 had few
one-off’s). However, earnings will likely be down ~30% yoy, as we estimate total
provisions at Rs35bn (vs. Rs15bn in 1QFY11), driven by Rs28bn of NPL-related
provisions including up-fronting of regulatory provisions (Rs10bn for countercyclical
buffer, Rs10bn for catch-up on new NPL norms and Rs5bn for
restructured loans) and Rs6bn for MTM losses on bond book.
PNB: Top-line growth estimated at 15% yoy, driven by volume growth of +22-
23% yoy, but margins declining +10-15bps yoy and qoq. While we estimate
operating profit to grow +15-16% yoy, net profit growth estimated at only +8-9%
yoy, as we build in higher provisions arising from fresh NPLs and regulatory
provisions . We estimate NPL slippages to be at ~Rs10bn vs. Rs12bn in 4QFY11.
BOI is likely to report top-line growth of only +15-16% yoy (vs. 49% yoy in
4QFY11), partly owing to absence of int. on IT refund (Rs2.8bn in 4Q). We also
expect margins to decline by +20-25bps qoq on back of this (absence of int. on IT
refund) and volume growth moderating to +20% levels (vs +25% yoy in FY11.
While operating profits likely to grow +7-8% yoy, profit to decline +8-9% yoy
owing to higher provisions. We expect BOI’s slippage level at elevated levels of
~Rs8-9bn in 1QFY12, as BOI fully migrates to online NPL recognition system.
Canara Bank: While operating level earnings should grow modest +4-5% yoy,
the bank is likely to show a +18-20% yoy decline in net profit owing to higher
provisions (up +90% yoy), as it takes a hit on regulatory provisions of ~Rs2bn and
our estimate of higher slippages leading to overall credit costs at elevated levels.
Top-line growth also weak relatively (+10-11% yoy), as the bank’s higher share of
bulk deposits (30% of total) eat in to any benefits accruing from recent QIP. We
estimate margin decline of +15-20bps yoy.
BOB: BOB is likely to show top-line (NII) growth of 25% yoy driven by +25% yoy
loan growth. Margins, in our view, are likely to decline +20bps. Net profit growth
should come in at 11% yoy owing to higher provisions. We expect slippages
(gross) to be at Rs+5bn in 1QFY12.
Union Bk of India: We think slippages during the 1QFY12 may see a very sharp
rise (+50% qoq) owing to a few large a/c’s becoming NPLs and due to the shift of
smaller loans to the on-line NPL recognition system. Moreover, with margins also
likely to be down qoq, we reckon 1QFY12 earnings may be down +15-16% yoy.
OBC: We expect OBC’s top line (NII) to be weak (down +6-7% yoy; only bk)
owing to higher (+25-30bps) margin contraction (weak CASA franchise / higher
share of wholesale deposits). OBC’s profits also decline by +22% yoy, driven by
MTM hits (higher duration) and regulatory provisions. However, OBC’s slippages
could be
Non-banking finance companies
HDFC Ltd.: We expect disbursement growth at +19-20% yoy and loan growth at
20% yoy. Spreads should hold up at +2.3% levels. We expect earnings to grow at
+20-21% yoy. We do not expect any asset-quality issues despite rising rates. We
expect gross NPLs of HDFC to be ~80bps.
LIC Housing: Disbursement growth likely to be +22-23% yoy and loan growth at
+26-27% yoy, led by strong growth in retail lending. Spreads could be at +1.8-
1.9%, owing to rising funding costs. Margins, too, are likely to be down by +35-
45bps qoq to ~3.0% levels (flattish yoy). We expect net profit to grow +25% yoy.
Shriram Transport Finance: While 1QFY12 earnings growth is likely to be only
+15-16% yoy, owing to the high base of the same period last year, we believe
that business growth should be strong, with AUM growth of +20% yoy and
margins of +7.9-8.0%. Asset quality is also likely to hold-up (gross at 2.6%; flat).
Price objective basis & risk
HDFC Bank (XHDFF)
We set our PO at Rs2700 (US$195/ADR) to factor in 1) overall strong growth
momentum, especially top line, and 2) we believe HDFC BK is likely to deliver
RoEs of 19% on profit growth of +30% through FY12/13. We believe the stock
could continue to trade at 4.2-4.3x (currently at +4.3x FY11) FY12 book owing to
sustaining visibility of high earnings growth and comfortable asset quality.
Alternatively, stock is likely to trade in sync with earnings growth (P/E) as we
begin to move into a stronger growth phase. The bank appears yet to fully benefit
from its expanded distribution, higher capitalization, and rising loan growth. A
sharp rise in NPLs and inability to maintain growth are risks to our price objective.
ICICI Bank (ICIJF)
We set our PO at Rs1400. ICICI Bank appears amongst the better positioned
banks to both capitalize on growth and best positoned in terms of asset quality.
We believe the bank trading at 2.0-2.1x FY12e (bk. biz.) can trade up to +2.5-
2.6x, which is a premium to theoretical multiples, led by earnings trajectory of
+30% (topline) and a sharp unwinding of credit costs, especially where most
banks asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get out PO of Rs1400. Risks are sharp rise in interest rates could
hurt margins (35% of total deosits wholesale for ICICI Bank) and slowdown in
macro growth could lead to lower volume growth and earnings trajectory for
FY12.
Punjab (PUJBF)
We like PNB for its ability to manage margins, asset quality (provisions coverage
at over +73%) and RoEs (+24-25%). On this basis, we reckon that risk-return
remains amongst the most favorable. Our PO of Rs1400 is pegged at 1.9x FY12E
adj. book (versus historical trading range of 1.6-2.1x) and at theoretical (Gordon)
multiples assuming RoE of 25pct and CoE at 14pct. Risks are higher exposure to
commercial real estate can lead to rise in NPLs and a sharp rise in interest rates
at sector level could lead to a slowdown in growth and earnings.
SBI (SBINF)
Our 12-month price objective on SBI is Rs2950 (US$132/GDR). We believe SBIs
banking business can still trade at +2.1x FY12 book (+1.7-1.8x FY12 book) owing
to 1) earnings growth strong in FY12 (yoy) at +65%, operating earnings growth
est. also at 24% yoy in FY12 and 2) RoEs rebounding to 20% in FY12 (vs <13%
in FY11), implying a banking biz. value of Rs2693. Add to that non-banks biz.
another Rs257/share, we arrive at our PO of Rs2950. Our PO is benchmarked to
Gordon model theory where we assume RoE of 20pct and CoE of 14% and
assign a +50% premium to theoretical multiples owing to its large liability
franchise and dominant position in the market (+23pct market share at group
level). On a PE basis, the stock is trading at 7.8x FY12E if we adjust the share
price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
Shriram Transport Finance (SHTFF)
We rate Shriram Transport Finance (STFCL) a Buy, with a PO of Rs900. STFCL
is a leader in pre-owned truck financing (organized), with 20-25% market share,
and it has a 7-8% share in new truck finance. STFCL, owing to its unique
appraisal skills, wide local distribution and 10-year track record, has shown a
75% earnings CAGR over the past 5 years, while restricting net NPLs to 1.0%.
We estimate earnings growth at +24% in FY12/13E, and RoE to be amongst the
highest, at over +28%. We, therefore, believe the stock, trading at +3.7x FY11E
book, can trade up to +3.3x FY12 book. Our PO is at a +65% premium to Gordon
multiples owing to high returns (highest in the sector) and market leadership
position of the company. Alternatively, one can value STFCL on PE basis, given
that the company has the flexibility of securitizing, which can allow it to raise
capital without dilution. Our PO implies 13x FY12E earnings, which is lower than
the historical P/E range of 14x-15x and still a +15% discount to market multiples.
Risks are a rise in defaults, which could erode earnings, and the entry of banks
into the used CV finance segment, which could hurt yields.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Banks-Retail
1QFY12 Earnings: mixed-bag,
but priced-in
�� 1Q12 earnings: mixed-bag; most Govt. banks on weak foot
Earnings growth to be a mixed-bag for banks, with private banks (barring Axis Bk)
leading the pack at +30%. Most govt. banks may show a decline in earnings,
owing to higher regulatory provisions / normalized credit costs and possible MTM
hits. But we believe this is likely to be the worst quarter for banks. Operating
earnings for most should grow +10-12% yoy. Govt. banks’ earnings to be driven
by top-line growth of +15-16% yoy, led by volume growth of +20-22% yoy, but
margins could decline by 15-25bps. SBI likely to show 30% decline. A few govt.
banks, like PNB, BOB and Indian Bk, could show +8-12% growth.
+30% earnings growth for ICICI, HDFC Bk, Yes Bk and Fed Bk
ICICI Bk and HDFC Bk to stand out with +30-35% earnings growth, driven by +21-
22% top-line growth as margins hold up yoy for both. Axis Bk may disappoint
(+24-25% yoy growth), owing to margin pressure (+20-25bps yoy decline) and a
higher-than-estimated hit on the corporate bond book owing to rise in bond yields.
Amongst smaller names, Yes Bk and Federal Bk likely to report +30% yoy growth.
Top-line growth in mid-teens, as margins under pressure
We estimate govt. banks to report top-line (NII) growth of +15-16%. This is driven
by +21% loan growth and a +15-25bps decline in margins yoy, led by 1) lower
incremental LDRs (<45-50%); 2) Higher PSL (low-yielding); 3) impact of savings
rate increase by 50bps and; 4) rise in funding costs (ahead of lending rate hikes).
ICICI Bk and HDFC Bk stand out with +21-22% yoy top-line growth.
NPLs: ‘key to watch’; credit cost high; MTM (bonds) for few
NPL slippages likely to remain elevated in 1QFY12, partly due to the residual
impact of online NPL recognition (~15-25% of loans not yet covered for most govt.
banks). Credit costs to also be higher yoy, on RBI’s new provisioning norms (on
restructured loans and NPL aging). ICICI Bk and HDFC Bk to still have best asset
quality (though may also see qoq NPL rise). MTM losses on bonds to be minimal.
SBI (~Rs6bn) in the large banks and OBC, BOI and Corp. Bk may be hit the most.
NBFCs: volume growth strong, but margins under pressure
We expect most NBFCs to show +20-25% yoy volume growth. But margins may
be down +20-30bps on a rise in costs. HDFC Ltd. likely to maintain 2.3% spread,
but LIC Hsg. and STFC may see a margin decline of +20-40bps qoq.
1Q earnings weakness priced-in; prefer quality (IBN & HDB)
Bank stocks have corrected by 5-15% in the past quarter on expectations of rising
rates, slowing growth / weak margins and asset quality pangs. We, however,
believe most of this is priced in and likely to be captured in 1QFY12 earnings. We
continue to prefer quality banks (with high CASA) such as ICICI Bk and HDFC Bk,
and in the govt. banks, we like SBI and PNB. We like STFC in the NBFC space,
owing to unique business model, skills sets and return ratios.
1QFY12 Earnings summary
We highlight our view on key bank / NBFCs earnings estimate for 1QFY12:
ICICI Bank: Top-line growth estimated at +22% yoy, driven by 20% yoy volume
growth, but we estimate a margin decline of +15-20bps, to 2.5%, driven by 1) full
effect of PSL lending and 2) full effect of increase in term deposit costs. We
expect NPL slippages of ~Rs2.5bn of MFI (buy out portfolio), but credit costs to
be down +40% yoy to Rs4.5bn.
HDFC Bank likely to show +30% yoy net profit growth, driven by +22% yoy topline
growth. Margins to be down +10bps yoy, but maintained qoq. We expect
operating earnings to grow 15% yoy. Asset quality is likely to hold up, but we
could see some rise qoq, partly owing to MFI-related NPLs rising post
restructuring of MFI exposure during the quarter.
Axis Bank to show net profit growth of +25% yoy, a shift from usual ~30% yoy.
The weak profitability will likely be driven by top-line growth of only 17% yoy, as
we estimate margins to decline +25bps yoy, to +3.4-3.5%. Moreover, while
provisions will be down +20% yoy, will remain at elevated levels as we expect
corporate bond book to take in some MTM hits owing to rise in bond yields.
SBI: Top line to grow +17-18% yoy, driven by +17-18% volume growth and
margins flat yoy (3.2%), but core margins likely to improve qoq (4QFY11 had few
one-off’s). However, earnings will likely be down ~30% yoy, as we estimate total
provisions at Rs35bn (vs. Rs15bn in 1QFY11), driven by Rs28bn of NPL-related
provisions including up-fronting of regulatory provisions (Rs10bn for countercyclical
buffer, Rs10bn for catch-up on new NPL norms and Rs5bn for
restructured loans) and Rs6bn for MTM losses on bond book.
PNB: Top-line growth estimated at 15% yoy, driven by volume growth of +22-
23% yoy, but margins declining +10-15bps yoy and qoq. While we estimate
operating profit to grow +15-16% yoy, net profit growth estimated at only +8-9%
yoy, as we build in higher provisions arising from fresh NPLs and regulatory
provisions . We estimate NPL slippages to be at ~Rs10bn vs. Rs12bn in 4QFY11.
BOI is likely to report top-line growth of only +15-16% yoy (vs. 49% yoy in
4QFY11), partly owing to absence of int. on IT refund (Rs2.8bn in 4Q). We also
expect margins to decline by +20-25bps qoq on back of this (absence of int. on IT
refund) and volume growth moderating to +20% levels (vs +25% yoy in FY11.
While operating profits likely to grow +7-8% yoy, profit to decline +8-9% yoy
owing to higher provisions. We expect BOI’s slippage level at elevated levels of
~Rs8-9bn in 1QFY12, as BOI fully migrates to online NPL recognition system.
Canara Bank: While operating level earnings should grow modest +4-5% yoy,
the bank is likely to show a +18-20% yoy decline in net profit owing to higher
provisions (up +90% yoy), as it takes a hit on regulatory provisions of ~Rs2bn and
our estimate of higher slippages leading to overall credit costs at elevated levels.
Top-line growth also weak relatively (+10-11% yoy), as the bank’s higher share of
bulk deposits (30% of total) eat in to any benefits accruing from recent QIP. We
estimate margin decline of +15-20bps yoy.
BOB: BOB is likely to show top-line (NII) growth of 25% yoy driven by +25% yoy
loan growth. Margins, in our view, are likely to decline +20bps. Net profit growth
should come in at 11% yoy owing to higher provisions. We expect slippages
(gross) to be at Rs+5bn in 1QFY12.
Union Bk of India: We think slippages during the 1QFY12 may see a very sharp
rise (+50% qoq) owing to a few large a/c’s becoming NPLs and due to the shift of
smaller loans to the on-line NPL recognition system. Moreover, with margins also
likely to be down qoq, we reckon 1QFY12 earnings may be down +15-16% yoy.
OBC: We expect OBC’s top line (NII) to be weak (down +6-7% yoy; only bk)
owing to higher (+25-30bps) margin contraction (weak CASA franchise / higher
share of wholesale deposits). OBC’s profits also decline by +22% yoy, driven by
MTM hits (higher duration) and regulatory provisions. However, OBC’s slippages
could be
Non-banking finance companies
HDFC Ltd.: We expect disbursement growth at +19-20% yoy and loan growth at
20% yoy. Spreads should hold up at +2.3% levels. We expect earnings to grow at
+20-21% yoy. We do not expect any asset-quality issues despite rising rates. We
expect gross NPLs of HDFC to be ~80bps.
LIC Housing: Disbursement growth likely to be +22-23% yoy and loan growth at
+26-27% yoy, led by strong growth in retail lending. Spreads could be at +1.8-
1.9%, owing to rising funding costs. Margins, too, are likely to be down by +35-
45bps qoq to ~3.0% levels (flattish yoy). We expect net profit to grow +25% yoy.
Shriram Transport Finance: While 1QFY12 earnings growth is likely to be only
+15-16% yoy, owing to the high base of the same period last year, we believe
that business growth should be strong, with AUM growth of +20% yoy and
margins of +7.9-8.0%. Asset quality is also likely to hold-up (gross at 2.6%; flat).
Price objective basis & risk
HDFC Bank (XHDFF)
We set our PO at Rs2700 (US$195/ADR) to factor in 1) overall strong growth
momentum, especially top line, and 2) we believe HDFC BK is likely to deliver
RoEs of 19% on profit growth of +30% through FY12/13. We believe the stock
could continue to trade at 4.2-4.3x (currently at +4.3x FY11) FY12 book owing to
sustaining visibility of high earnings growth and comfortable asset quality.
Alternatively, stock is likely to trade in sync with earnings growth (P/E) as we
begin to move into a stronger growth phase. The bank appears yet to fully benefit
from its expanded distribution, higher capitalization, and rising loan growth. A
sharp rise in NPLs and inability to maintain growth are risks to our price objective.
ICICI Bank (ICIJF)
We set our PO at Rs1400. ICICI Bank appears amongst the better positioned
banks to both capitalize on growth and best positoned in terms of asset quality.
We believe the bank trading at 2.0-2.1x FY12e (bk. biz.) can trade up to +2.5-
2.6x, which is a premium to theoretical multiples, led by earnings trajectory of
+30% (topline) and a sharp unwinding of credit costs, especially where most
banks asset quality continues to see-saw. Add to this subs (non-bank) value of
Rs237/shr, we get out PO of Rs1400. Risks are sharp rise in interest rates could
hurt margins (35% of total deosits wholesale for ICICI Bank) and slowdown in
macro growth could lead to lower volume growth and earnings trajectory for
FY12.
Punjab (PUJBF)
We like PNB for its ability to manage margins, asset quality (provisions coverage
at over +73%) and RoEs (+24-25%). On this basis, we reckon that risk-return
remains amongst the most favorable. Our PO of Rs1400 is pegged at 1.9x FY12E
adj. book (versus historical trading range of 1.6-2.1x) and at theoretical (Gordon)
multiples assuming RoE of 25pct and CoE at 14pct. Risks are higher exposure to
commercial real estate can lead to rise in NPLs and a sharp rise in interest rates
at sector level could lead to a slowdown in growth and earnings.
SBI (SBINF)
Our 12-month price objective on SBI is Rs2950 (US$132/GDR). We believe SBIs
banking business can still trade at +2.1x FY12 book (+1.7-1.8x FY12 book) owing
to 1) earnings growth strong in FY12 (yoy) at +65%, operating earnings growth
est. also at 24% yoy in FY12 and 2) RoEs rebounding to 20% in FY12 (vs <13%
in FY11), implying a banking biz. value of Rs2693. Add to that non-banks biz.
another Rs257/share, we arrive at our PO of Rs2950. Our PO is benchmarked to
Gordon model theory where we assume RoE of 20pct and CoE of 14% and
assign a +50% premium to theoretical multiples owing to its large liability
franchise and dominant position in the market (+23pct market share at group
level). On a PE basis, the stock is trading at 7.8x FY12E if we adjust the share
price for the subsidiary value. Risks are a sharp rise in NPLs and a hike in
interest rates.
Shriram Transport Finance (SHTFF)
We rate Shriram Transport Finance (STFCL) a Buy, with a PO of Rs900. STFCL
is a leader in pre-owned truck financing (organized), with 20-25% market share,
and it has a 7-8% share in new truck finance. STFCL, owing to its unique
appraisal skills, wide local distribution and 10-year track record, has shown a
75% earnings CAGR over the past 5 years, while restricting net NPLs to 1.0%.
We estimate earnings growth at +24% in FY12/13E, and RoE to be amongst the
highest, at over +28%. We, therefore, believe the stock, trading at +3.7x FY11E
book, can trade up to +3.3x FY12 book. Our PO is at a +65% premium to Gordon
multiples owing to high returns (highest in the sector) and market leadership
position of the company. Alternatively, one can value STFCL on PE basis, given
that the company has the flexibility of securitizing, which can allow it to raise
capital without dilution. Our PO implies 13x FY12E earnings, which is lower than
the historical P/E range of 14x-15x and still a +15% discount to market multiples.
Risks are a rise in defaults, which could erode earnings, and the entry of banks
into the used CV finance segment, which could hurt yields.
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