Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Still amid choppy waters; stocks not yet ready for upturn
Stocks trading in a narrow range; no significant positive catalysts
Since May 2011, Indian financials’ stocks have traded sideways due to multiple
headwinds: (1) Sticky inflation, (2) policy tightening, (3) Potential growth
deceleration, (4) increasing risk to asset quality, (5) weaker earnings outlook on
margin pressure. While inflation and interest rates are close to their peaks, we
believe earnings would remain under pressure on lower margin, higher NPLs.
Stocks peak/bottom before inflation does, but are not overvalued
Our analysis of historical trends indicate that the financials sector displays a
high correlation with inflation, interest rates, GDP, IIP and suggest that banking
stocks tend to peak/bottom 4-6 months ahead of inflation levels peaking/
bottoming. Our GS Global ECS Research team forecasts inflation to peak in
Aug-Sep 2011 and believes there is a high probability that rates have peaked.
While investor holdings in the banking sector remain high, current valuations
are not at their peak vs. the previous cycle, and hence we do not expect a
sharp adjustment. We also believe outperformance is unlikely till we see
earnings correction, thereby leading to stocks trading in a narrow range.
Earnings performance to remain under pressure next few quarters
Lower loan growth at 18%-20% vs. over 21% last year, margin decline of
50-100 bps vs. peak in Dec 2010, MTM hit on investment portfolio, and lack
of treasury gains will lead to muted profit growth in FY12, in our view.
NPLs too will see a cyclical uptick, which will likely have a P&L impact. On
the positive front, we find banks have hiked lending rates (PLR at 14.25%
vs. 14%) more than deposit rates (9.25% vs. 10.5%) this cycle and margin
pressure will likely be less vs. the past. If RBI hikes rates any further,
margin compression could be more than expected, in our view.
Earnings headwinds likely to persist; we remain selective
While the sector is not overvalued, select sector defensives—HDFC Bank/HDFC/
Kotak—are trading at expensive valuations; rated Sell. We suggest being
selective and prefer private banks to PSU banks as we believe they are able to
manage their spreads better than PSUs through the rate cycle (Sell BOI). Our top
picks: IndusInd (Buy, on CL) and Yes Bank (Buy) given their strong earnings
growth as we believe margin pressure will be offset by higher CASA ratio; ICICI
Bank (Buy) – better growth prospects and the international book repricing to help
sustain its margins. We revise our 12-m TPs for stocks yet to report 1QFY12
results by 2%-5% as we roll forward our target BVPS to June-2012.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Still amid choppy waters; stocks not yet ready for upturn
Stocks trading in a narrow range; no significant positive catalysts
Since May 2011, Indian financials’ stocks have traded sideways due to multiple
headwinds: (1) Sticky inflation, (2) policy tightening, (3) Potential growth
deceleration, (4) increasing risk to asset quality, (5) weaker earnings outlook on
margin pressure. While inflation and interest rates are close to their peaks, we
believe earnings would remain under pressure on lower margin, higher NPLs.
Stocks peak/bottom before inflation does, but are not overvalued
Our analysis of historical trends indicate that the financials sector displays a
high correlation with inflation, interest rates, GDP, IIP and suggest that banking
stocks tend to peak/bottom 4-6 months ahead of inflation levels peaking/
bottoming. Our GS Global ECS Research team forecasts inflation to peak in
Aug-Sep 2011 and believes there is a high probability that rates have peaked.
While investor holdings in the banking sector remain high, current valuations
are not at their peak vs. the previous cycle, and hence we do not expect a
sharp adjustment. We also believe outperformance is unlikely till we see
earnings correction, thereby leading to stocks trading in a narrow range.
Earnings performance to remain under pressure next few quarters
Lower loan growth at 18%-20% vs. over 21% last year, margin decline of
50-100 bps vs. peak in Dec 2010, MTM hit on investment portfolio, and lack
of treasury gains will lead to muted profit growth in FY12, in our view.
NPLs too will see a cyclical uptick, which will likely have a P&L impact. On
the positive front, we find banks have hiked lending rates (PLR at 14.25%
vs. 14%) more than deposit rates (9.25% vs. 10.5%) this cycle and margin
pressure will likely be less vs. the past. If RBI hikes rates any further,
margin compression could be more than expected, in our view.
Earnings headwinds likely to persist; we remain selective
While the sector is not overvalued, select sector defensives—HDFC Bank/HDFC/
Kotak—are trading at expensive valuations; rated Sell. We suggest being
selective and prefer private banks to PSU banks as we believe they are able to
manage their spreads better than PSUs through the rate cycle (Sell BOI). Our top
picks: IndusInd (Buy, on CL) and Yes Bank (Buy) given their strong earnings
growth as we believe margin pressure will be offset by higher CASA ratio; ICICI
Bank (Buy) – better growth prospects and the international book repricing to help
sustain its margins. We revise our 12-m TPs for stocks yet to report 1QFY12
results by 2%-5% as we roll forward our target BVPS to June-2012.
No comments:
Post a Comment