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India Equity Research Reports, IPO and Stock News
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India banks
Gloom, doom, kaboom!
Downgrade financials: asset quality & opex the two culprits
We cut our FY13/14E earnings for financials by ~20% due to rising credit costs
and opex. Our estimates are ~20% below consensus for PSU banks. We also
cut our TPs by ~30% driven by structurally lower ROEs. The Street, in our view,
is underestimating the extent of asset quality and opex woes. Since the
beginning of the financial year, the Street has cut earnings estimates by a mere
4% for FY13, which we view as grossly inadequate. We would stay with banks
that have balance sheet transparency and where the risk to book is the least. We
prefer retail focused banks like HDFC and Kotak, for which we are confident of
the book, and we would avoid the PSUs completely and even private sector
banks like ICICI and Axis, for which our confidence on the quality of book built up
in the past few years is low. We downgrade ICICI to Neutral and the PSUs to
Underperform or Neutral. We downgrade SBI to Underperform.
Balance sheets matter and not earnings, and the former is
in bad shape; credit costs to increase materially
We don’t think the market will be looking at earnings, which can be overstated by
banks through restructurings and regulatory forbearance that, in turn, could
result in delayed recognition of NPLs. Balance sheets matter, and they are
becoming increasingly opaque. Credit culture in the agriculture sector post the
debt waiver has been affected, and we expect vulnerable sectors like power,
commercial real estate, exports, etc, to post large NPL increases; and the best of
the retail asset quality cycle is behind us, in our view. We expect credit costs to
increase by 20-30bps in FY13 over FY12. The Street, in our view, could be at a
much lower number. Our channel checks and detailed analysis suggest that
roughly 3.5% of advances and nearly 40% of power sector advances could
be restructured. We expect stressed assets as a proportion of net-worth to
increase from 60% at the end of FY11 to 100% by FY13E for PSUs.
Structural issues on opex: regulatory obligation & pension
In the last decade, PSU banks reaped very large cost benefits from their
technological platforms, with virtually no expansion either in branches or the
employee workforce. That phase appears to be over, with PSU banks now
embarking on an expansion drive, and, hence, we think productivity benefits
should wane. Moreover, the issue of pensions is still not over, with most of them
estimating pensions on outdated mortality tables, which are likely to be revised
soon. The switching of employees to a defined benefit obligation (DBO) scheme
last year is likely to put pressure on opex as cost of servicing DBO is high. The
regulatory diktat to open 25% of new branches in rural areas coupled with
tightening of PSL norms is likely to make life tougher for banks. We assume no
productivity benefits (flat cost to average assets ratio) for PSUs from FY13
onward, and we expect a 10bps increase in the cost-to-assets ratio for privates.
No use of looking at P/BV when the book itself is at risk!
We are not going to recommend accumulating banks just because valuations
look deceptively cheap. PSU banks are trading close to or below book, but
valuations appear cheap or lower than historical averages because book value
itself, in our view, is grossly overstated and doesn’t reflect the risks inherent in
the banks’ balance sheets. Key catalysts would be a sharp pickup in restructured
assets and further earnings downgrades by the Street.
click on links below for company specific reports:
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India banks
Gloom, doom, kaboom!
Downgrade financials: asset quality & opex the two culprits
We cut our FY13/14E earnings for financials by ~20% due to rising credit costs
and opex. Our estimates are ~20% below consensus for PSU banks. We also
cut our TPs by ~30% driven by structurally lower ROEs. The Street, in our view,
is underestimating the extent of asset quality and opex woes. Since the
beginning of the financial year, the Street has cut earnings estimates by a mere
4% for FY13, which we view as grossly inadequate. We would stay with banks
that have balance sheet transparency and where the risk to book is the least. We
prefer retail focused banks like HDFC and Kotak, for which we are confident of
the book, and we would avoid the PSUs completely and even private sector
banks like ICICI and Axis, for which our confidence on the quality of book built up
in the past few years is low. We downgrade ICICI to Neutral and the PSUs to
Underperform or Neutral. We downgrade SBI to Underperform.
Balance sheets matter and not earnings, and the former is
in bad shape; credit costs to increase materially
We don’t think the market will be looking at earnings, which can be overstated by
banks through restructurings and regulatory forbearance that, in turn, could
result in delayed recognition of NPLs. Balance sheets matter, and they are
becoming increasingly opaque. Credit culture in the agriculture sector post the
debt waiver has been affected, and we expect vulnerable sectors like power,
commercial real estate, exports, etc, to post large NPL increases; and the best of
the retail asset quality cycle is behind us, in our view. We expect credit costs to
increase by 20-30bps in FY13 over FY12. The Street, in our view, could be at a
much lower number. Our channel checks and detailed analysis suggest that
roughly 3.5% of advances and nearly 40% of power sector advances could
be restructured. We expect stressed assets as a proportion of net-worth to
increase from 60% at the end of FY11 to 100% by FY13E for PSUs.
Structural issues on opex: regulatory obligation & pension
In the last decade, PSU banks reaped very large cost benefits from their
technological platforms, with virtually no expansion either in branches or the
employee workforce. That phase appears to be over, with PSU banks now
embarking on an expansion drive, and, hence, we think productivity benefits
should wane. Moreover, the issue of pensions is still not over, with most of them
estimating pensions on outdated mortality tables, which are likely to be revised
soon. The switching of employees to a defined benefit obligation (DBO) scheme
last year is likely to put pressure on opex as cost of servicing DBO is high. The
regulatory diktat to open 25% of new branches in rural areas coupled with
tightening of PSL norms is likely to make life tougher for banks. We assume no
productivity benefits (flat cost to average assets ratio) for PSUs from FY13
onward, and we expect a 10bps increase in the cost-to-assets ratio for privates.
No use of looking at P/BV when the book itself is at risk!
We are not going to recommend accumulating banks just because valuations
look deceptively cheap. PSU banks are trading close to or below book, but
valuations appear cheap or lower than historical averages because book value
itself, in our view, is grossly overstated and doesn’t reflect the risks inherent in
the banks’ balance sheets. Key catalysts would be a sharp pickup in restructured
assets and further earnings downgrades by the Street.
click on links below for company specific reports:
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