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Sector Name: India Financials
Potential result outperformers: ICICI Bk
Potential result underperformers: Axis Bank & IDFC
Result Expectations – Key Highlights
1Q earnings: weakness ahead for most govt. banks
Bank stocks have corrected by 5-15% in 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.
Earnings growth: a mixed-bag; weak for govt. banks, private bks at+30%
Earnings growth expected to be a mixed-bag for banks, with private banks
(barring Axis Bk) leading the pack at +30%. Most govt. banks may show decline in
earnings. ICICI Bk and HDFC Bk, to stand out with +30-35% earnings growth driven
by +21-22% topline 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 higher
than estimated hit on corporate bond book owing to rise in yields. Amongst smaller
names, Yes Bk and Federal Bk likely to report +30% yoy growth.
Govt. banks’ earnings likely to show similar trend of 1) topline growth of +15-16%
yoy led by volume growth of +20-22% yoy, but margin compression of 15-25bps.
Operating earnings to grow +10-12% yoy for most govt. banks. However, net
profit to decline for most owing to higher regulatory provisions ‘/ normalized credit
costs and possible MTM hits. SBI likely to show 30% decline. Few govt. banks
likely to show +8-12% growth may be PNB, BOB and Indian.
Topline growth in mid-teens for govt banks, as margins decline yoy
We estimate govt. banks to report topline (NII) growth of +15-16%. This is driven
by an 21% loan growth and 15-25bps decline in margins yoy led by 1) lower
incremental LDRs; 2) Higher PSL (priority sector lending) requirements; 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 topline growth.
NPL: ‘area of watch’; credit costs to remain high on regulatory req.
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 be also higher yoy on low base effect and RBI’s new
provisioning norms (on restructured loans and NPL aging). ICICI Bk and HDFC
Bk to still have the best asset quality (though may also see qoq NPL rise).
MTM loss on bonds could add on to earnings woes for few govt. banks
MTM losses on bonds to be minimal. The 10 year yield was at 7.9% on June 30th
(up 39bps in the qtr). Most banks have a cushion of upto ~8% and for every
10bps rise in yields, impact on earnings is est. at 1-1.2%. SBI (Rs6bn) in the large
banks and OBC, BOI and Corporation Bk may be hit the most. We are not
factoring impact arising from shifting of the AFS portfolio to the HTM category.
NBFCs: volume growth strong, but some margin pressure
We expect most NBFCs to show a +20-25% yoy volume growth. However,
margins for some may be down +20-30bps owing to rise in funding costs. HDFC
Ltd., in our view, will maintain its spread of 2.3%, but LIC Hsg. and STFC may
see a margin decline of +20-30bps qoq.
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