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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
First, we discuss the current macroeconomic issues relating to inflation and the likely RBI stance.
Second, we examine the stock performance of banks under different interest-rate cycles – identifying the
outperformers and underperformers. Third and most important, we outline our views on asset quality
issues, where we are not that bearish and provide reasons for our relative positive stance. Fourth, we
discuss areas like credit growth, the likely impact on bond yields from higher fiscal slippages, margin
outlook, treasury gains, etc. Finally we discuss valuations, where we conclude that current valuations offer
a good opportunity to buy as the stocks are trading at below its long-term average P/ABV multiples and
factors in several negative developments that may unfold in the next 3-4 months.
Base-case view: RBI to remain on hold, Eurozone finds a solution to the Greece debt problem
Our base-case view is that India’s central bank, Reserve Bank of India (RBI), will be on hold for the
remainder of FY12 and will take a breather before resuming a soft stance beginning next fiscal. We also
believe the Eurozone will find a solution to ring-fence Greece’s debt problems. We concur with the broader
market’s view that we are unlikely to see a repeat of the period following the Lehman bankruptcy. However,
we try to capture these concerns through a probability-based methodology to derive target prices for the
banks we cover.
Market seems to be factoring in only negatives, ignoring the fundamentals
Despite near-term headwinds related to asset quality, rising bond yields and slowing credit demand, we
believe asset quality will not deteriorate to the extent the market seems to be fearing, that loan growth will
remain at 17-18% over FY12-13, that margins will hold up and that treasury gains will largely cushion any
shocks in FY13. Based on this, as well as the inherently strong fundamentals of the Indian banks (FY11
capital adequacy at 14.2%, healthy ROA of 1.1% and ROE 15-20%), we find value in the Indian banking stocks
at current price levels.
We estimate earnings CAGR of 24.9% over FY11-13E for our coverage universe
We estimate our banking universe will deliver earnings CAGR of 24.9% over FY11-13 (driven by stable loan
growth, decent margins, stable opex and credit costs) vs 13.4% over FY09-11. But, note that SBI reported
flat earnings over FY09-11, so excluding SBI, our earnings CAGR estimate would be 22.1% over FY11-13, vs
21.5% over FY09-11. Over FY11-13, we forecast PSU banks’ earnings CAGR at 25.1% (19.1% excluding SBI)
and private-sector banks’ earnings CAGR at 24.7%.
Risk-return looks favourable with valuations below long-term averages
We believe concerns about asset quality on high slippages are overdone, as the banks this time around are
sitting on a more secured and seasoned book compared to that in FY08-09. Rather risks are in the existing
restructured book. Additionally, the infrastructure exposure (power in particular) is unlikely to turn into
NPAs in banks’ books in the near term, but will get restructured. We expect infrastructure (power) related
issues to take time to play out completely over the next two-to-three years, which may remain an overhang
on the performance of banks with significant infrastructure (power) exposure. At current valuations for PSU
banks (0.8-1.1x FY13E ABV) and private-sector banks (1.3-3.1x FY13E ABV), we believe most of the
macro/sector-specific negatives are priced in and the risk-return is favourable.
Initiate coverage on five PSU banks, five private-sector banks, and HDFC
The sector developments are likely to remain mixed over the next 12 months in terms of growth, asset
quality, bond yields and margins. Hence, our sector view is NEUTRAL, but valuations are forward looking
and we believe are factoring in several negatives and appear very attractive to us. We will look to increase
exposure to the Indian banking sector with a 12-month view.
Top picks – Axis Bank, Union Bank (post 2QFY12 results), IndusInd and HDFC Bank
Our top picks from an absolute return perspective are Union Bank (post the 2QFY12 results) in the PSU
space and Axis Bank in the private space. IndusInd and HDFC Bank also remain among our preferred picks
due to their relatively low infrastructure-related risk and healthy earnings outlook.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
First, we discuss the current macroeconomic issues relating to inflation and the likely RBI stance.
Second, we examine the stock performance of banks under different interest-rate cycles – identifying the
outperformers and underperformers. Third and most important, we outline our views on asset quality
issues, where we are not that bearish and provide reasons for our relative positive stance. Fourth, we
discuss areas like credit growth, the likely impact on bond yields from higher fiscal slippages, margin
outlook, treasury gains, etc. Finally we discuss valuations, where we conclude that current valuations offer
a good opportunity to buy as the stocks are trading at below its long-term average P/ABV multiples and
factors in several negative developments that may unfold in the next 3-4 months.
Base-case view: RBI to remain on hold, Eurozone finds a solution to the Greece debt problem
Our base-case view is that India’s central bank, Reserve Bank of India (RBI), will be on hold for the
remainder of FY12 and will take a breather before resuming a soft stance beginning next fiscal. We also
believe the Eurozone will find a solution to ring-fence Greece’s debt problems. We concur with the broader
market’s view that we are unlikely to see a repeat of the period following the Lehman bankruptcy. However,
we try to capture these concerns through a probability-based methodology to derive target prices for the
banks we cover.
Market seems to be factoring in only negatives, ignoring the fundamentals
Despite near-term headwinds related to asset quality, rising bond yields and slowing credit demand, we
believe asset quality will not deteriorate to the extent the market seems to be fearing, that loan growth will
remain at 17-18% over FY12-13, that margins will hold up and that treasury gains will largely cushion any
shocks in FY13. Based on this, as well as the inherently strong fundamentals of the Indian banks (FY11
capital adequacy at 14.2%, healthy ROA of 1.1% and ROE 15-20%), we find value in the Indian banking stocks
at current price levels.
We estimate earnings CAGR of 24.9% over FY11-13E for our coverage universe
We estimate our banking universe will deliver earnings CAGR of 24.9% over FY11-13 (driven by stable loan
growth, decent margins, stable opex and credit costs) vs 13.4% over FY09-11. But, note that SBI reported
flat earnings over FY09-11, so excluding SBI, our earnings CAGR estimate would be 22.1% over FY11-13, vs
21.5% over FY09-11. Over FY11-13, we forecast PSU banks’ earnings CAGR at 25.1% (19.1% excluding SBI)
and private-sector banks’ earnings CAGR at 24.7%.
Risk-return looks favourable with valuations below long-term averages
We believe concerns about asset quality on high slippages are overdone, as the banks this time around are
sitting on a more secured and seasoned book compared to that in FY08-09. Rather risks are in the existing
restructured book. Additionally, the infrastructure exposure (power in particular) is unlikely to turn into
NPAs in banks’ books in the near term, but will get restructured. We expect infrastructure (power) related
issues to take time to play out completely over the next two-to-three years, which may remain an overhang
on the performance of banks with significant infrastructure (power) exposure. At current valuations for PSU
banks (0.8-1.1x FY13E ABV) and private-sector banks (1.3-3.1x FY13E ABV), we believe most of the
macro/sector-specific negatives are priced in and the risk-return is favourable.
Initiate coverage on five PSU banks, five private-sector banks, and HDFC
The sector developments are likely to remain mixed over the next 12 months in terms of growth, asset
quality, bond yields and margins. Hence, our sector view is NEUTRAL, but valuations are forward looking
and we believe are factoring in several negatives and appear very attractive to us. We will look to increase
exposure to the Indian banking sector with a 12-month view.
Top picks – Axis Bank, Union Bank (post 2QFY12 results), IndusInd and HDFC Bank
Our top picks from an absolute return perspective are Union Bank (post the 2QFY12 results) in the PSU
space and Axis Bank in the private space. IndusInd and HDFC Bank also remain among our preferred picks
due to their relatively low infrastructure-related risk and healthy earnings outlook.
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